
[Federal Register Volume 82, Number 7 (Wednesday, January 11, 2017)]
[Notices]
[Pages 3375-3379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00367]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79743; File No. SR-C2-2016-021]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Order Approving a Proposed Rule Change Relating to Opening and Closing 
Rotations for Series Trading on the Exchange

January 5, 2017.

I. Introduction

    On November 4, 2016, C2 Options Exchange, Incorporated 
(``Exchange'' or ``C2'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules relating to 
the opening and closing of

[[Page 3376]]

series for trading on the Exchange. The Commission published the 
proposed rule change for comment in the Federal Register on November 
21, 2016.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79315 (November 15, 
2016), 81 FR 83313 (``Notice'').
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II. Description of the Proposed Rule Change

    C2 proposes to amend its rules relating to the opening and closing 
of series for trading on the Exchange. Rule 6.11 describes the process 
that the automated trading system used by the Exchange for the trading 
of options contracts (the ``System'') uses to open series on the 
Exchange each trading day. The Exchange may also use this process for 
closing series or opening series after a trading halt. The Exchange is 
proposing various changes to reorganize and simplify the rule and to 
more accurately reflect current System functionality.\4\
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    \4\ See id. at 83313.
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    According to the Exchange, the System generally processes the 
opening of each series in four stages: \5\
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    \5\ See id.
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    (1) Pre-Opening Period: During the pre-opening period, the System 
accepts orders and quotes and disseminates messages that contain 
information based on resting orders and quotes in the book, which may 
include the expected opening price (``EOP''), expected opening size 
(``EOS''), any reason why a series may not open, and imbalance 
information, including the size and side of an imbalance (collectively, 
``expected opening information'' or ``EOIs'').
    (2) Initiation of the Opening Rotation: The System then initiates 
the opening rotation procedure and distributes a ``Rotation Notice'' to 
market participants.
    (3) Opening Rotation Period: During the opening rotation period, 
the System matches and executes orders and quotes against each other to 
establish an opening Exchange best bid and offer (``BBO'') and trade 
price for each series while continuing to disseminate EOIs.
    (4) Opening of Trading: The System then opens series for trading, 
subject to the satisfaction of certain conditions.
    According to C2, the proposed rule change is designed to more 
clearly organize Rule 6.11 in this sequential order and makes the 
additional specific changes discussed in more detail below.
Pre-Opening Period
    Rule 6.11(a) currently provides that the System accepts orders and 
quotes for a period of time before the opening of trading in the 
underlying security or, in the case of index options, prior to 8:30 
a.m.\6\ The Exchange proposes to amend Rule 6.11(a) to provide that the 
pre-opening period will begin no later than 15 minutes prior to the 
expected initiation of an opening rotation and no earlier than 2:00 
a.m.\7\
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    \6\ All times set forth in Rule 6.11 are central time. See id. 
at 83313, n.3. In addition, since the System begins the pre-opening 
period at the same time for each class within each type of option 
(equity, index and exchange-traded products (``ETPs'')), the 
proposed rule change deletes the provision of the current rule that 
says the Exchange will determine the time on a class-by-class basis. 
See id. at 83313.
    \7\ The Exchange notes that the pre-opening period currently 
begins at approximately 6:30 a.m. See id. at 83313, n.4.
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    Under the proposal, the Exchange generally will not restrict the 
size or origin code of orders that may be submitted during the pre-
opening period. Therefore, the proposed rule change amends Rule 
6.11(a)(1) to delete the provision that requires the Exchange to 
designate on a class-by-class basis the eligible order size, eligible 
order type, and eligible order origin code which the System will 
accept.\8\ Additionally, the proposed rule change clarifies that the 
System will accept all quotes and all order types during the pre-
opening period except for immediate-or-cancel, fill-or-kill, 
intermarket sweep orders, and Market-Maker trade prevention orders.\9\
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    \8\ See id. at 83313.
    \9\ See id. at 83313-14 for a discussion of these order types, 
which are defined in Rule 6.10.
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    The proposed rule change amends Rule 6.11(a)(2) in several ways. 
First, it defines EOIs and specifies the timing of their dissemination. 
EOIs contain information based on resting orders and quotes in the 
Book, including the EOP, the EOS, any reason why a series may not open 
pursuant to paragraph (d) of Rule 6.11,\10\ and any imbalance 
information, including the size and side of the imbalance. EOIs will be 
disseminated to all market participants that have elected to receive 
them beginning at a time determined by the Exchange, which will be no 
earlier than three hours prior to the expected initiation of an opening 
rotation for a series. The System will then disseminate EOIs at regular 
intervals of time, or less frequently if there are no updates since the 
previously disseminated EOI.\11\
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    \10\ Proposed paragraph (d) of Rule 6.11 sets forth certain 
opening conditions, which are discussed in greater detail below.
    \11\ See Notice, supra note 3, at 83314.
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    The proposed rule change further modifies Rule 6.11(a)(2) to 
redefine the terms EOP and EOS and address when that information will 
be disseminated. Currently, Rule 6.11(a)(2) states that the EOP is the 
price at which the greatest number of orders and quotes in the book are 
expected to trade and provides that an EOP will only be calculated if 
(a) there are market orders in the book, or the book is crossed or 
locked and (b) at least one quote is present. The proposed rule change 
revises this language to state that the EOP is the price at which any 
opening trade is expected to execute and adds that the EOS is the size 
of any expected opening trade. The proposed rule change further states 
the System will only disseminate EOP and EOS messages if the width 
between the highest quote bid and lowest quote offer on the Exchange or 
disseminated by other exchanges is no wider than the ``Opening Exchange 
Prescribed Width range'' or ``OEPW range'' (as described below).\12\
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    \12\ See id. at 83313-14, for more detailed discussion of these 
changes to the pre-opening period. According to the Exchange, the 
OEPW range is a price protection measure intended to prevent orders 
from executing at extreme prices on the open. See id. at 83317.
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Opening Rotation Initiation and Notice
    Rule 6.11(b) currently provides that, unless unusual circumstances 
exist, at a randomly selected time within a number of seconds after the 
opening trade and/or the opening quote is disseminated in the market 
for the underlying security\13\ (or after 8:30 a.m. for index options), 
the System initiates the opening rotation procedure and sends a notice 
(``Rotation Notice'') to market participants.
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    \13\ The ``market for the underlying security'' is currently the 
primary listing market, the primary volume market (defined as the 
market with the most liquidity in that underlying security for the 
previous two calendar months), or the first market to open the 
underlying security. Since the Exchange does not designate the 
primary volume market as the market for the underlying security for 
any class, the proposed rule change deletes that option. The 
proposed rule change also changes the term ``market'' to 
``exchange'' and clarifies that the Exchange determines on a class-
by-class basis which market is the market for the underlying 
security. See id. at 83314, n.8.
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    The Exchange proposes to amend Rule 6.11(b) to provide that the 
System will initiate the opening rotation procedure and send out a 
Rotation Notice on a class-by-class basis as follows:
    [cir] With respect to equity and ETP options, after the opening 
trade or the opening quote is disseminated in the market for the 
underlying security, or at 8:30 a.m. for classes determined by the 
Exchange (including over-the-counter equity classes); or
    [cir] with respect to index options, at 8:30 a.m., or at the later 
of 8:30 a.m. and the time the Exchange receives a

[[Page 3377]]

disseminated index value for classes determined by the Exchange.\14\
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    \14\ See id. at 83314-15 (providing detailed description of the 
Exchange's changes to initiating the opening rotation).
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Opening Rotation Period
    Rule 6.11(c) provides that after the Rotation Notice is sent, the 
System enters into a rotation period, during which the opening price is 
established for each series. The proposed rule change reorganizes 
paragraph (c) to more clearly demarcate and further describe (1) when 
the opening rotation period begins, (2) what happens during the period, 
(3) the handling of EOIs during the period, and (4) when the period 
ends.\15\
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    \15\ See proposed Rule 6.11(c); see also Notice, supra note 3, 
at 83315.
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    During the opening rotation period, the System establishes the 
opening trade price and the opening BBO by matching and executing 
resting orders and quotes against each other. The proposed rule change 
modifies the definition of the opening trade price of a series to be 
the ``market-clearing'' price, which is the single price at which the 
largest number of contracts in the book can execute, leaving bids and 
offers that cannot trade with each other.\16\ The proposed rule change 
also states that all orders (except complex orders) and quotes in a 
series in the book prior to the opening rotation period participate in 
the opening rotation for a series. The Exchange notes that contingency 
orders that participate in the opening rotation may execute during the 
opening rotation period only if their contingencies are triggered.\17\
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    \16\ See Notice, supra note 3, at at 83315. If there are 
multiple prices at which the same number of contracts would clear, 
the System will use the price at or nearest to the midpoint of the 
range consisting of the higher of the opening NBB and widest bid 
point of the OEPW range, and the lower of the opening NBO and widest 
offer point of the OEPW range. See id.
    \17\ See id. Further, the Exchange notes that the proposed rule 
change moves the rule provision regarding the priority order of 
orders and quotes during this matching process from current 
subparagraph (g)(1) to proposed subparagraph (c)(1)(C). The System 
prioritizes orders in the following order: (1) Market orders, (2) 
limit orders and quotes whose prices are better than the opening 
price, and (3) resting orders and quotes at the opening price. The 
proposed rule change also notes that contingency orders are 
prioritized as set forth in Rule 6.12(c). See id. at 83315, n.11, 
and accompanying text.
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    The proposed rule change clarifies that the System will continue to 
disseminate EOIs (not just the EOP and EOS) during the opening rotation 
period, which may be disseminated at more frequent intervals closer to 
the opening.\18\ In addition, the proposed rule change updates the 
description of the length of the opening rotation period and adds 
detail to the description of how the System processes series to open 
following the opening rotation period. Specifically, current 
subparagraph (c)(2) states that the System will process the series of a 
class in a random order and the series will begin opening after a 
period following the Rotation Notice, which period may not exceed sixty 
seconds and will be established on a class-by-class basis by the 
Exchange.\19\ Proposed subparagraph (c)(3) retains that process, but 
clarifies that C2 will determine the length and number of these 
intervals for all classes.\20\
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    \18\ See id. at 83315.
    \19\ See id. at 83315-16.
    \20\ According to the Exchange, currently, the Exchange has set 
the period of time that must pass before the System begins 
processing series to open at one second, and the Exchange has set 
the number of intervals to one and the length of that interval to 
one second. As a result, the opening rotation period currently lasts 
one to two seconds. See Regulatory Circular RG11-008; see also 
Notice, supra note 3, at 83316, n.12.
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Opening Quote and Trade Price
    In its filing, the Exchange represented that, pursuant to the 
Options Price Reporting Authority (``OPRA'') Plan, once a series opens, 
the System disseminates all quote and trade price information to OPRA, 
including opening quote and trade price information.\21\ Accordingly, 
the Exchange proposes to delete text in current paragraph (d) of Rule 
6.11 stating that the opening price is determined by series and that C2 
disseminates opening quote and trade information through OPRA, because 
the Exchange already disseminates such information pursuant to the OPRA 
Plan, and therefore believes that this provision is unnecessarily 
repetitive.\22\ Despite the deletion of that language from the rule 
concerning reporting data through OPRA, the Exchange is not proposing a 
substantive change to reporting this information through OPRA.
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    \21\ See Notice, supra note 3, at 83316.
    \22\ See id.
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Opening Conditions
    Current Rule 6.11(e) provides that the System will not open a 
series if one of a number of specified conditions is met, including the 
absence of a quote or if the opening price would not be within an 
acceptable range, or if the opening trade would be at a price that is 
not the national best bid or offer (``NBBO'') or would leave a market 
order imbalance.\23\ Current Rule 6.11(f) describes what happens when 
each of these conditions is present, including matching orders and 
quotes to the extent possible or exposing marketable orders at the NBBO 
under certain conditions. The proposed rule change would amend the 
opening conditions as follows:
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    \23\ See id.
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    (1) If there are no quotes on the Exchange or disseminated from at 
least one away exchange present in the series, the System will not open 
the series;
    (2) if the width between the best quote bid and best quote offer, 
which may consist of Market-Makers quotes or bids and offers 
disseminated from an away exchange, is wider than an acceptable opening 
price range (as determined by the Exchange on a class-by-class and 
premium basis) (the OEPW range) \24\ and there are orders or quotes 
marketable against each other or that lock or cross the OEPW range, the 
System will not open the series. However, if the opening quote width is 
no wider than the intraday acceptable price range for the series 
(``IEPW range'') and there are no orders or quotes marketable against 
each other or that lock or cross the OEPW range, the System will open 
the series. If the opening quote width is wider than the IEPW range, 
the System will not open the series. If the opening quote for a series 
consists solely of bids and offers disseminated from an away 
exchange(s), the System will open the series by matching orders and 
quotes to the extent they can trade and will report the opening trade, 
if any, at the opening trade price. The System will then expose any 
remaining marketable buy (sell) orders at the widest offer (bid) point 
of the OEPW range or NBO (NBB), whichever is lower (higher).
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    \24\ Current OEPW settings are set forth in Regulatory Circular 
RG14-020. See Notice, supra note 3, at 83316, n.14.
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    (3) if the opening trade price would be outside the OEPW range or 
the NBBO, the System will open the series by matching orders and quotes 
to the extent they can trade and will report the opening trade, if any, 
at an opening trade price not outside either the OEPW range or NBBO. 
The System will then expose any remaining marketable buy (sell) orders 
at the widest offer (bid) point of the OEPW range or NBO (NBB), 
whichever is lower (higher);
    (4) if the opening trade would leave a market order imbalance, the 
System will open the series by matching orders and quotes to the extent 
they can trade and will report the opening trade, if any, at the 
opening trade price. The System will then expose any remaining 
marketable buy (sell) orders at the widest offer (bid) point of the 
OEPW range or NBO (NBB), whichever is lower (higher); or
    (5) if the opening quote bid (offer) or the NBB (NBO) crosses the 
opening

[[Page 3378]]

quote offer (bid) or the NBO (NBB) by more than an amount determined by 
the Exchange on a class-by-class and premium basis, the System will not 
open the series.\25\ If the opening quote bid (offer) or NBO (NBO) 
crosses the opening quote offer (bid) or NBO (NBB) by no more than the 
specified amount, the System will open the series by matching orders 
and quotes to the extent they can trade and will report the opening 
trade, if any, at the opening trade price. The System will then expose 
any remaining marketable buy (sell) orders at the widest offer (bid) 
point of the OEPW range or NBO (NBB), whichever is lower (higher). If 
the best away market bid and offer are inverted by no more than the 
specified amount, there is a marketable order on each side of the 
series, and the System opens the series, the System will expose the 
order on the side with the larger size and route for execution the 
order on the side with the smaller size to an away exchange that is at 
the NBBO.\26\
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    \25\ Currently, this amount is $0.25 for options with prices 
less than $3.00 and $0.50 for options with prices of $3.00 or more. 
See Regulatory Circular RG10-005; see also Notice, supra note 3, at 
83317, n.17.
    \26\ See Notice, supra note 3, at 83317.
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    In addition, the proposed rule change moves provisions related to 
the exposure of orders at the open from current subparagraph (g)(2) and 
Interpretation and Policy .04 to proposed paragraph (d) to eliminate 
duplicative language and to include all provisions regarding the 
opening exposure process in one place.\27\ The proposed rule change 
provides that the exposure of orders pursuant to proposed paragraph (d) 
will be conducted via the Hybird Agency Liaison (``HAL'') pursuant to 
Rule 6.18. Because the Exchange no longer uses a matching period for 
HAL opening auctions and just uses an exposure period (which may not 
exceed 1.5 seconds), it proposes to delete the provision regarding the 
matching period, among other changes.\28\
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    \27\ See id. at 83317.
    \28\ See id. at 83317-18.
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    The Exchange also proposes to add to paragraph (d) that if the 
System does not open a series pursuant to paragraph (d), 
notwithstanding proposed paragraph (c) (which states the opening 
rotation period may not last more than 60 seconds), the opening 
rotation period continues (including the dissemination of EOIs) until 
the condition causing the delay is satisfied or the Exchange otherwise 
determines it is necessary to open a series in accordance with proposed 
paragraph (e).\29\
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    \29\ Current Rule 6.11(j) and proposed Rule 6.11(g) provide that 
the opening procedures described in the rule may also be used to 
conduct a closing rotation after the close of a trading session for 
series that open pursuant to Rule 6.11. The proposed rule change 
makes non-substantive changes to proposed paragraph (g) to more 
clearly and simply state the potential applicability of the opening 
procedures to a closing rotation for series that open pursuant to 
Rule 6.11 and to include additional detail regarding the 
notification to Participants regarding the decision to conduct a 
closing rotation. See id. at 83318, n.20.
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Exchange Determinations
    Current Rule 6.11 provides in various places, including paragraphs 
(b)(2) and (h), that a senior Exchange official in the Help Desk may 
determine whether to modify the opening procedures when they deem 
necessary. The Exchange proposes to delete paragraph (b)(2) and 
centralize references to the Help Desk in one paragraph (retitled from 
(h) to (e)). The proposed rule change lists examples of actions the 
Help Desk may take in the interests of commencing or maintaining a fair 
and orderly market, in the event of unusual market conditions, or in 
the public interest, including delaying or compelling the opening of 
any series in any options class, and modifying timers or settings 
described in Rule 6.11. The proposed rule change adds that the Exchange 
will make and maintain records to document all determinations to 
deviate from the standard manner of the opening procedure, and 
periodically review these determinations.\30\
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    \30\ See id. at 83318.
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    The Exchange also proposes to amend Interpretation and Policy .02, 
which states all pronouncements regarding determinations by the 
Exchange pursuant to Rule 6.11 and the Interpretations and Policies 
thereunder will be announced via Regulatory Circular with appropriate 
advanced notice to ensure participants are aware of these 
determinations and have sufficient time to make any necessary changes 
in response to the determinations. The proposed rule change adds that 
notice of determinations with respect to the opening process may be 
made ``as otherwise provided,'' which recognizes that some parts of 
Rule 6.11 provide that certain notifications will be made in a 
different manner (for example, via electronic message rather than via 
Regulatory Circular).\31\
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    \31\ See id.
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Non-Substantive Changes
    The proposed rule change also amends current Rule 6.11(i) and 
proposed Rule 6.11(f) to indicate that the procedure described in Rule 
6.11 may be used to reopen a series, in addition to a class, after a 
trading halt to address a potential situation in which only certain 
series are subjected to halt. The proposed rule change also adds detail 
regarding notice of use of this opening procedure following a trading 
halt and clarifies that the procedure would be the same, though 
depending on facts and circumstances, there may be no pre-opening 
period or a shorter pre-opening period. Proposed paragraph (f) further 
states the Exchange will announce the reopening of a class or series 
after a trading halt as soon as practicable via electronic message to 
Participants that request to receive such messages.\32\
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    \32\ See id. C2 also notes that the Exchange may reopen a class 
after a trading halt as otherwise set forth in the Rules, including 
Rule 6.32. See id. at n.21.
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    The Exchange proposes to amend Interpretation and Policy .01, which 
states the Exchange may determine on a class-by-class basis which 
electronic algorithm from Rule 6.12 applies to the class during 
rotations. The proposed rule change makes the electronic algorithm that 
applies to a class intraday the default algorithm during rotations, but 
continues to leave the Exchange flexibility to apply a different 
algorithm to a class during rotations if it deems such action to be 
necessary or appropriate.\33\
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    \33\ See id. at 83318.
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    Finally, the proposed rule change makes numerous non-substantive 
and clerical changes throughout Rule 6.11 (and its Interpretations and 
Policies), including adding or amending headings and defined terms, 
updating cross-references, adding introductory and clarifying language, 
using consistent language and punctuation, and replacing terms such as 
``option series'' with series in recognition of the fact that C2 only 
trades options.\34\
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    \34\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act,\35\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\36\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\37\ 
which requires, among other things, that a

[[Page 3379]]

national securities exchange have rules 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.
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    \35\ 15 U.S.C. 78f.
    \36\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change reorganizes and attempts to 
clarify the description of the opening (and sometimes closing) 
procedures, deletes text that the Exchange believes is either obsolete 
or unnecessary, removes certain discretion for the Exchange to make 
determinations under the rule on a class-by-class basis where C2 no 
longer needs that discretion, and is intended to promote greater 
consistency across Rule 6.11. The Commission notes that these changes 
may offer market participants a better understanding of how the 
Exchange's opening (and sometimes closing) procedures operate. To the 
extent the changes achieve that goal, they may promote transparency, 
reduce the potential for investor confusion, and assist market 
participants in deciding whether to participate in C2's trading 
rotations and, if they do participate, have confidence and certainty as 
to how their orders will be processed by the C2 System.
    The Commission believes that the proposed rule change is designed 
to promote just and equitable principles of trade by seeking to ensure 
that series open in a fair and orderly manner with sufficient liquidity 
and opportunities for execution at prices that are determined by market 
forces. In particular, the Exchange notes that the proposed rule change 
is designed to ensure that market participants are aware of the 
circumstances under which the System may not open a series.\38\ The 
proposed rule change also sets out the circumstances when the Exchange 
may exercise discretion under the rule and strives to narrow that 
discretion within certain established parameters.\39\ The proposed rule 
change further requires the Exchange to document and periodically 
review Exchange decisions made under the rule to deviate from the 
standard opening procedures, and stipulates that the Help Desk can so 
deviate in response to unusual market conditions with specific regard 
to the public interest.\40\ In this manner, such Exchange 
determinations made by high-level senior Exchange personnel under the 
rule should be limited, transparent, and made with due regard to the 
Exchange's obligations under the Act.
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    \38\ See Notice, supra note 3, at 83319.
    \39\ Exchange determinations, including the establishment of 
parameters governing the opening process, will be set forth in 
Regulatory Circulars (or as otherwise specified by the Exchange 
under the proposed rule). On account of the critical importance of 
this information to investors' understanding of how the Exchange's 
System operates, C2 should ensure that such information is 
prominently displayed, readily searchable and retrievable, up-to-
date, and comprehensive.
    \40\ See proposed Rule 6.11(e); see also Notice, supra note 3, 
at 83318.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\41\ that the proposed rule change (SR-C2-2016-021) be, and hereby 
is, approved.
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    \41\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00367 Filed 1-10-17; 8:45 am]
 BILLING CODE 8011-01-P


