Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change to Adopt a Designated Primary Market-Maker Program, 55257-55265 [2012-22059]
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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Notices
provisions of 5 U.S.C. 552, will be
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NYSEMKT–2012–44 and should be
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2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–22058 Filed 9–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67772; File No. SR–C2–
2012–024]
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing of a Proposed Rule
Change to Adopt a Designated Primary
Market-Maker Program
August 31, 2012.
srobinson on DSK4SPTVN1PROD with NOTICES
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 August
21, 2012, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt a
Designated Primary Market-Maker
(‘‘DPM’’) program. The text of the
proposed rule change is available on the
Exchange’s Web site (https://www.
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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c2exchange.com/Legal/), at the
Exchange’s Office of the Secretary, at
the Commission’s Web site (https://www.
sec.gov), 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The proposed rule change proposes to
adopt a DPM program.3 The Exchange
believes the DPM program will
encourage deeper liquidity in allocated
classes by imposing obligations on
DPMs to attract order flow to the
Exchange in allocated securities and to
quote competitively. These proposed
Rules also impose special eligibility
requirements and market performance
standards on DPMs. As specialists,
DPMs will receive a trade participation
right in their allocated classes in
exchange for their heightened
responsibilities.
DPM Program
Rule 1.1—Definition of DPM 4
The proposed rule change amends
Rule 1.1 to adopt a definition of the
term ‘‘Designated Primary MarketMaker’’, which is used throughout the
proposed DPM Rules. A DPM is a
Participant 5 organization that is
approved by the Exchange to function in
3 The proposed rules are based generally on the
rules governing the DPM program on Chicago Board
Options Exchange, Incorporated (‘‘CBOE’’),
excluding among other things certain provisions
that are inapplicable to C2 (such as provisions
related to floor trading and CBOE-specific
provisions) as well as other provisions that are
outdated. See CBOE Rules 6.45A(a)(ii)(2) and (iii),
6.45B(a)(i)(2) and (iii), 8.80, 8.83–8.91, 8.95, and
17.50(g)(14). See Item 8 of the Form 19b–4 for a
discussion of the differences between the proposed
Rules and the corresponding CBOE rules.
4 See CBOE Rule 8.80(a).
5 A ‘‘Participant’’ is an Exchange-recognized
holder of a Trading Permit, which is an Exchangeissued permit that confers the ability to transact on
the Exchange. See Rule 1.1.
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55257
allocated securities as a Market-Maker
and is subject to obligations under
proposed Rule 8.17. The purpose of
requiring that a DPM be an organization
is to ensure that each DPM has a formal
organizational structure in place to
govern the manner in which it will
operate as a DPM. The Exchange
believes it is essential that it have the
sole authority to approve a Participant
organization to act as a DPM to ensure
that the Participant organization
satisfies the eligibility requirements set
forth in proposed Rule 8.14 and the
financial requirements set forth in
proposed Rule 8.18, and can otherwise
meet the obligations and responsibilities
of a DPM set forth in proposed Rule
8.17.
Rule 8.14—Approval to Act as a DPM 6
Proposed Rule 8.14 addresses the
DPM approval process. To act as a DPM,
a Participant must file an application
with the Exchange on such forms as the
Exchange may prescribe. The Exchange
will determine the appropriate number
of approved DPMs. The Exchange will
make each DPM approval from among
the DPM applications on file with the
Exchange, based on the Exchange’s
judgment as to which applicant is best
able to perform the functions of a DPM.
The factors the Exchange may consider
when making this selection include, but
are not limited to, any one or more of
the following:
(1) Adequacy of capital;
(2) operational capacity;
(3) trading experience of and
observance of generally accepted
standards of conduct by the applicant
and its associated persons;
(4) regulatory history of and history of
adherence to Exchange Rules by the
applicant and its associated persons;
and
(5) willingness and ability of the
applicant and its associated persons to
promote the Exchange as a marketplace.
The following are some examples of
the many ways in which the Exchange
may consider these factors:
• In considering adequacy of capital
of an applicant, the Exchange may look
at whether the applicant meets the
financial requirements set forth in
proposed Rule 8.18 and whether it
otherwise has the resources to meet the
heightened responsibilities.
• In considering operational capacity
of an applicant, the Exchange may look
to criteria such as the number of MarketMakers or personnel and the ability to
process order flow in determining
whether it would be able to satisfy the
DPM obligations in an efficient manner.
6 See
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CBOE Rules 8.83, 8.88, and 8.89.
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• In considering trading experience of
and observance of generally accepted
standards of conduct by the applicant
and its associated persons, the Exchange
may look at the applicant’s and its
associated persons’ history at the
Exchange or in the industry, the trading
volume of the applicant and its
associated persons, and market
performance reviews in determining
whether the applicant would be able to
meet the DPM market performance
standards.
• In considering the regulatory
history of and history of adherence to
Exchange Rules by the applicant and its
associated persons, the Exchange may
look to whether the applicant or its
associated persons have been found to
have violated Exchange rules or have
been subject to any enforcement
proceedings in determining whether the
applicant and its associated persons
would comply with obligations imposed
by the DPM Rules and other Rules of the
Exchange, as well as federal securities
laws and regulations.
• In considering willingness and
ability of the applicant and its
associated persons to promote the
Exchange as a marketplace, the
Exchange may look at whether the
applicant has engaged (or how it intends
to engage) in activities such as assisting
in meeting and educating market
participants, maintaining
communications with Participants in
order to be responsive to suggestions
and complaints, and responding to
suggestions and complaints in
determining whether the applicant
could bring order flow to the Exchange.
These are the primary factors that the
Exchange believes are necessary for it to
consider when determining whether a
DPM applicant is able to meet the DPM
obligations, responsibilities, and market
performance standards imposed by the
proposed DPM Rules. Given that the
Exchange may limit the number of
approved DPMs, it is important that the
Exchange can reasonably determine that
the Participants it approves to act as
DPMs will increase liquidity and quote
competitively in order to attract order
flow as intended by the proposed DPM
program.
Each applicant for approval as a DPM
will have an opportunity to present any
matter that it wishes the Exchange to
consider in conjunction with the
approval decision. The Exchange may
require that a presentation be solely or
partially in writing, and may require the
submission of additional information
from the applicant or its associated
persons. Formal rules of evidence will
not apply to these proceedings. This
opportunity will allow a DPM applicant
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to ensure that the Exchange considers
all information that the DPM applicant
deems relevant, in addition to the
standard information described by the
factors above that the Exchange reviews.
The Exchange believes the presentation
of this information, in addition to the
information requested by the Exchange,
will result in fair and fully informed
decisions by the Exchange during the
DPM approval process.
In selecting an applicant for approval
as a DPM, the Exchange may place one
or more conditions on the approval,
including but not limited to conditions
concerning the capital or operations of
or persons associated with the DPM
applicant, and the number or type of
securities that may be allocated to the
applicant. Depending on the
circumstances surrounding a specific
DPM applicant, the Exchange believes it
is necessary to have the ability to
impose conditions on the specific DPM
approval in addition to the obligations
otherwise imposed by the DPM Rules as
an additional means to ensure that the
DPM applicant is able to adequately
perform the DPM functions.
Each DPM will retain its approval to
act as a DPM for one year, unless the
Exchange relieves the DPM of its
approval and obligations to act as a
DPM or earlier terminates the DPM’s
approval to act as a DPM pursuant to
proposed Rule 8.20. After each one-year
term, a DPM may file an application
with the Exchange to renew its approval
to act as a DPM on forms prescribed by
the Exchange, which renewal
application the Exchange may approve
or disapprove in its sole discretion in
the same manner and based on the same
factors set forth in proposed Rule
8.14(b) through (d), and any other
factors the Exchange deems relevant
(including an evaluation of the extent to
which the DPM has satisfied its
obligations under proposed Rule 8.17).
Because the proposed rule change
provides that the Exchange will
determine the appropriate number of
approved DPMs in a class, the Exchange
believes that having temporary DPM
appointments will provide all
Participants with regular opportunities
to be selected as DPMs by the Exchange
rather than allow certain Participants to
have perpetual DPM appointments.
If the Exchange terminates or
otherwise limits its approval for a
Participant to act as a DPM, the
Exchange may do one or both of the
following: (1) Approve a DPM on an
interim basis, pending the final
approval of a new DPM; and (2) allocate
on an interim basis to another DPM(s)
the securities that were allocated to the
affected DPM, pending a final allocation
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of the securities pursuant to proposed
Rule 8.15 (as described below). Neither
an interim approval nor allocation will
be viewed as a prejudgment with
respect to the final approval or
allocation. Interim approvals and
allocations will provide uninterrupted
DPM quoting in appointed classes and
prevent any reduced liquidity in those
classes that could otherwise result from
a termination, condition, or limit on a
DPM’s approval or allocation.
Proposed Rule 8.14(g) provides that
DPM appointments may not be sold,
assigned, or otherwise transferred
without prior written approval of the
Exchange. This provision clarifies that
only the Exchange may authorize a firm
to act as a DPM, which will allow the
Exchange to ensure that a Participant is
qualified to adequately perform DPM
functions and fulfill its obligations and
responsibilities as a DPM under the
proposed DPM Rules.
Rule 8.15—Allocation of Securities to
DPMs 7
Proposed Rule 8.15 sets forth the
manner in which the Exchange will
allocate securities to DPMs. Proposed
Rule 8.15(a) provides that the Exchange
will determine for each security traded
on the Exchange whether the security
should be allocated to a DPM and, if so,
to which DPM the security should be
allocated. The proposed rule change
could produce additional quotation
volume in classes that are allocated to
DPMs. The Exchange maintains a
rigorous capacity planning program that
monitors system performance and
projected capacity demands and, as a
general matter, considers the potential
system capacity impact of all new
initiatives. The Exchange has analyzed
the potential for additional quote traffic
resulting from the addition of DPMs and
has concluded that the Exchange has
sufficient system capacity to handle
those additional quotes without
degrading the performance of its
systems. The Exchange also notes that
any additional quote traffic will be
limited, as the Exchange may allocate
securities to DPMs on a class-by-class
basis as opposed to allocating all classes
to DPMs. Ultimately, the Exchange
believes that it has the necessary
systems capacity to allocate option
classes to DPMs as described in this
proposed rule change. The Exchange
will monitor quoting volume associated
with DPMs and its effect on C2’s
systems.
Proposed Rule 8.15(b) describes the
criteria that the Exchange may consider
in making allocation determinations.
7 See
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CBOE Rule 8.95.
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The factors the Exchange may consider
when making these determinations
include, but are not limited to, any one
or more of the following: Performance,
volume, capacity, market performance
commitments, operational factors,
efficiency, competitiveness,
environment in which the security will
be traded, expressed preferences of
issuers, and recommendations of any
Exchange committees. The following are
some examples of the many ways in
which these criteria may be applied:
• In considering performance, the
Exchange may look at the market
performance ranking of the applicable
DPMs, as established by market
performance reviews that are conducted
by the Exchange.
• In considering volume, the
Exchange may look at the anticipated
trading volume of the security and the
trading volume attributable to the
applicable DPMs in determining which
DPMs would be best able to handle the
additional volume.
• In considering capacity, operational
factors, and efficiency, the Exchange
may look to criteria such as the number
of Market-Makers or DPM personnel, the
ability to process order flow, and the
amount of DPM capital in determining
which DPMs would be best able to
handle additional securities.
• In considering marketing
performance commitments, the
Exchange may look at the pledges a
DPM has made with respect to how
narrow its bid-ask spreads will be and
the number of contracts for which it will
honor its disseminated market
quotations beyond what is required by
Exchange Rules.
• In considering competitiveness, the
Exchange may look at percentage of
volume attributable to a DPM in
allocated securities that are multiply
listed.
• In considering the environment in
which the security will be traded, the
Exchange may seek a proportionate
distribution of securities between the
Market-Maker system and the DPM
system and across different DPMs.
• In considering expressed
preferences of issuers, the Exchange
may consider the views of the issuer of
a security traded on the Exchange with
respect to the allocation of that security
or to the licensor of an index on which
an index option is based with respect to
the allocation of that index option.
• The Exchange may consider the
recommendation of any Exchange
committees, particularly those that
evaluate DPM market performance.
Proposed Rule 8.15(c) provides that
the Exchange may remove an allocation
and reallocate the applicable security
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during a DPM’s term if the DPM fails to
adhere to any market performance
commitments made by the DPM in
connection with receiving the
allocation. The Exchange typically
requests that DPMs make market
performance commitments as part of
their applications to receive allocations
of particular securities. As described
above, these commitments may relate to
pledges to keep bid-ask spreads within
a particular width or to make
disseminated quotes firm for a
designated number of contracts beyond
what is required by Exchange Rules.
Proposed Rule 8.15(c) permits the
Exchange to remove an allocation if
these commitments are not met, which
the Exchange believes will incentive
[sic] DPMs to abide by these
commitments. The Exchange believes
these types of commitments will be
instrumental in causing DPMs to quote
more competitively.
Proposed Rule 8.15(c) also provides
that the Exchange may change an
allocation determination if it concludes
that doing so is in the best interests of
the Exchange based on operational
factors or efficiency. For example, if,
due to market conditions, trading
volume in a security greatly increased
over a very short time frame and the
DPM allocated that security could not
handle the additional order flow, the
Exchange may deem it necessary to
reallocate the security to another DPM
with the capacity to do so. This
provision will allow the Exchange to
ensure that there is sufficient liquidity
during trading hours in the allocated
option classes.
Proposed Rule 8.15(d) provides that
prior to taking any action to remove an
allocation, the Exchange will generally
give the DPM prior notice of the
contemplated action and an opportunity
to be heard concerning the action. The
only exception to this requirement
would be in those unusual situations
when expeditious action is required due
to extreme market volatility or some
other situation requiring emergency
action. Specifically, except when
expeditious action is required, proposed
Rule 8.15(d) requires that prior to taking
any action to remove an allocation, the
Exchange must notify the DPM involved
of the reasons the Exchange is
considering taking the contemplated
action, and will either convene one or
more informal meetings with the DPM
to discuss the matter, or provide the
DPM with the opportunity to submit a
written statement to the Exchange
concerning the matter. Due to the
informal nature of the meetings
provided for under proposed Rule
8.15(d) and in order to encourage
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55259
constructive communication between
the Exchange and the affected DPM at
those meetings, ordinarily neither
counsel for the Exchange nor counsel
for the DPM will be invited to attend
these meetings and no verbatim record
of the meetings will be kept.
As with any decision made by the
Exchange, any person adversely affected
by a decision made by the Exchange to
remove an allocation may appeal the
decision to the Exchange under Chapter
19 of the Exchange Rules. The appeal
procedures in Chapter 19 provide for
the right to a formal hearing concerning
any such decision and for the right to be
accompanied, represented, and advised
by counsel at all stages of the
proceeding. In addition, any decision of
the Exchange’s Appeals Committee may
be appealed to the Board of Directors
pursuant to CBOE Rule 19.5 (which is
incorporated into the Exchange Rules).
The Exchange believes these hearing
and appeal procedures will provide
DPMs with appropriate due process
with respect to decisions made
regarding their DPM allocations and
will promote a fair and fully informed
decision-making process.
Proposed Rule 8.15(e) provides that
the allocation of a security to a DPM
does not convey ownership rights in the
allocation or in the order flow
associated with the allocation. Proposed
Rule 8.15(e) is intended to make clear
that DPMs may not buy, sell, or
otherwise transfer an allocation and
that, instead, the Exchange has the sole
authority to determine allocations. As
discussed above, DPM appointments
may only be transferred with Exchange
approval pursuant to proposed Rule
8.14(g).
Proposed Rule 8.15(f) provides that in
allocating and reallocating securities to
DPMs, the Exchange will act in
accordance with any limitation or
restriction on the allocation of securities
that is established pursuant to another
Exchange Rule. For example, the
Exchange may take remedial action
against a DPM for failure to satisfy
minimum market performance
standards, and such action may involve
a restriction related to the allocation of
securities to that DPM. Similarly, the
Exchange may place restrictions on a
DPM’s ability to receive or retain
allocations of securities pursuant to
various provisions of these proposed
Rules, including as a condition of
appointment as a DPM (proposed Rule
8.14(d)), due to failure to perform DPM
functions (proposed Rule 8.20(a)(2)), or
due to a material financial or
operational change (proposed Rule
8.20)(a)(1)). Proposed Rule 8.15(f) is
intended to make clear that the
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Exchange must act in accordance with
any of these restrictions in making
allocation determinations.
Proposed Rule 8.15, Interpretation
and Policy .01 generally provides that
the Exchange may reallocate a security
at the end of a DPM’s one-year term, in
the event that the security is removed
pursuant to another Exchange Rule from
the DPM to which the security has been
allocated, or in the event that for some
other reason the DPM to which the
security has been allocated no longer
retains the allocation. For example, at
the end of a DPM’s term, the Exchange
may allocate the security to the same
DPM again (if the DPM applied for its
appointment to be renewed and the
Exchange approved the renewal
application), to another DPM, or to no
DPM. As another example, as described
above, the Exchange may take remedial
actions against DPMs in specified
circumstances, including the removal of
an allocation. Proposed Rule 8.15,
Interpretation and Policy .01 is intended
to clarify that in the event the Exchange
removes an allocation pursuant to
Exchange Rules, the Exchange will
reallocate the security pursuant to
proposed Rule 8.15. The only exception
to this provision is that the Exchange is
authorized pursuant to proposed Rule
8.14(f) to allocate to an interim DPM on
a temporary basis a security that is
removed from another DPM until the
Exchange has made a final allocation of
the security. As with several other
proposed Rules, this provision is
intended allow the Exchange to ensure
that there is sufficient liquidity in
allocated classes despite changing
circumstances.
Rule 8.16—Conditions on the Allocation
of Securities to DPMs 8
Proposed Rule 8.16 allows the
Exchange to establish (1) restrictions
applicable to all DPMs on the
concentration of securities allocable to a
single DPM and to affiliated DPMs and
(2) minimum eligibility standards
applicable to all DPMs, which must be
satisfied in order for a DPM to receive
allocations of securities, including but
not limited to standards relating to
adequacy of capital and operational
capacity (including number of
personnel). Among the reasons for
granting the Exchange the authority to
limit the concentration of securities
allocable to a single DPM and to
affiliated DPMs is to promote
competition in the Exchange’s market
and to help ensure that no DPM or
group of affiliated DPMs is allocated
such a large number of securities that it
8 See
CBOE Rule 8.84.
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would be difficult for the Exchange to
quickly reallocate those securities to
other DPMs or Market-Makers in the
event that for some reason the DPM or
group of affiliated DPMs were no longer
able to perform in that capacity. Among
the reasons for granting the Exchange
the authority to establish minimum
eligibility standards for DPMs to receive
allocations of securities is to help
ensure that a DPM has the financial and
operational ability to handle additional
allocations of securities and meet its
DPM obligations with respect to those
securities. Similarly, the Exchange may
utilize this proposed Rule to establish
specific minimum market performance
standards that must be satisfied by
DPMs in order to receive allocations of
securities so that a DPM that is not
performing adequately with respect to
the securities that have already been
allocated to the DPM is not allocated
additional securities.
Rule 8.17—DPM Obligations 9
Proposed Rule 8.17 describes the
obligations of a DPM. Proposed Rule
8.17(a) includes the general obligation
with respect to each of its allocated
securities to fulfill all of the obligations
of a Market-Maker under Exchange
Rules in addition to the requirements
set forth in this proposed Rule.10
Proposed Rule 8.17(a) requires each
DPM:
(1) To provide continuous quotes in at
least the lesser of 99% of the nonadjusted option series (as defined in
Rule 8.5(a)(1)) or 100% of the nonadjusted option series minus one callput pair of each option class allocated
to it, with the term ‘‘call-put pair’’
referring to one call and one put that
cover the same underlying instrument
and have the same expiration date and
exercise price, and assure that its
disseminated market quotations are
accurate; 11
(2) to assure that each of its displayed
market quotations are for the number of
contracts required by Rule 8.6(a),
‘‘Market-Maker Firm Quotes’’;
(3) to segregate in a manner
prescribed by the Exchange (a) all
9 See
CBOE Rule 8.85.
the extent there is any inconsistency
between the specific obligations of a DPM set forth
in proposed Rule 8.17 and the general obligations
of a Market-Maker under the Exchange Rules,
proposed Rule 8.17 will govern.
11 For purposes of this provision, ‘‘continuous’’
means 90% of the time. If a technical failure or
limitation of the System prevents a DPM from
maintaining, or from communicating to the
Exchange, timely and accurate quotes in a series,
the duration of such failure will not be considered
in determining whether that that [sic] DPM has
satisfied the 99% quoting standard with respect to
the series.
10 To
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transactions consummated by the DPM
in securities allocated to the DPM and
(b) any other transactions consummated
by or on behalf of the DPM that are
related to the DPM’s DPM business; 12
(4) to not initiate a transaction for the
DPM’s own account that would result in
putting into effect any stop or stop limit
order that may be in the Book 13 and
when the DPM guarantees that the stop
or stop limit order will be executed at
the same price as the electing
transaction; 14 and
(5) to ensure that a trading rotation is
initiated promptly following the
opening of the underlying security (or
promptly after 8:30 a.m. Central Time in
an index class) in accordance with Rule
6.11 in 100% of the series of each
allocated class by entering opening
quotes as necessary.
Proposed Rule 8.17(b) provides that a
DPM may not represent discretionary
orders as an agent in its allocated
classes.
Proposed Rule 8.17(c) lists additional
obligations of a DPM, including that a
DPM must:
(1) Resolve disputes relating to
transactions in the securities allocated
to the DPM, subject to Exchange official
review, upon the request of any party to
the dispute;
(2) make competitive markets on the
Exchange and otherwise promote the
Exchange in a manner that is likely to
enhance the ability of the Exchange to
compete successfully for order flow in
the classes it trades;
(3) promptly inform the Exchange of
any material change in the financial or
operational condition of the DPM;
(4) supervise all persons associated
with the DPM to assure compliance
with the Exchange Rules;
(5) segregate in a manner prescribed
by the Exchange the DPM’s business
and activities as a DPM from the DPM’s
other business and activities; 15 and
(6) continue to act as a DPM and to
fulfill all of the DPM’s obligations as a
DPM until its DPM appointment has
lapsed, the Exchange relieves the DPM
12 This will permit the Exchange to monitor each
DPM’s trading positions in order to ensure that the
DPM is in compliance with the financial and other
requirements that are applicable DPMs.
13 The term ‘‘Book’’ means the electronic book of
buy and sell orders and quotes maintained by the
System. The ‘‘System’’ is the automated trading
system used by the Exchange for the trading of
options contracts. See Rule 1.1.
14 These restrictions apply to stop or stop limit
orders only if the terms of such orders are visible
to the DPM or if such orders are handled by the
DPM.
15 This requirement will help reduce the risk that
a DPM’s financial integrity will be adversely
impacted by financial losses that may be incurred
by the DPM in connection with its other businesses
and activities.
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of its approval and obligations to act as
a DPM, or the Exchange terminates the
DPM’s approval to act as a DPM
pursuant to proposed Rule 8.20.
Proposed Rule 8.17(d) provides that
each person associated with a DPM will
be obligated to comply with the
provisions of proposed Rule 8.17(a)
through (c) when acting on behalf of the
DPM.
Proposed Rule 8.17(e) provides that
each DPM must hold the number of
Trading Permits as may be necessary
based on the aggregate ‘‘registration
cost’’ for the classes allocated to the
DPM. Each Trading Permit held by the
DPM has a registration cost of 1.0.16 For
example, if the Exchange allocates to a
DPM classes with an aggregate
registration cost of 1.6, the DPM would
be required to hold two Trading
Permits. The Exchange may change at
any time the registration cost of any
option class; upon any such change,
each DPM will be required to hold the
appropriate number of Trading Permits
reflecting the revised registration costs
of the classes that have been allocated
to it. Additionally, a DPM is required to
hold the appropriate number of Trading
Permits at the time a new option class
is allocated to it pursuant to proposed
Rule 8.16 begins trading.
In the event a Participant approved as
a DPM is also approved to act as a
Market-Maker and has excess Trading
Permit capacity above the aggregate
registration cost for the classes allocated
to it as the DPM, the Participant may
utilize the excess Trading Permit
capacity to quote in an appropriate
number of classes in the capacity of a
Market-Maker. For example, if the DPM
has been allocated a number of option
classes with an aggregate registration
cost of 1.6, the Participant could request
an appointment as a Market-Maker in
any combination of option classes
whose aggregate registration cost does
not exceed 0.40. The Participant will
not function as a DPM in any of these
additional classes. In the event the
Participant utilizes any excess Trading
Permit capacity to quote in some
additional classes as a Market-Maker, it
must comply with the provisions of
Rule 8.2.
Rule 8.17, Interpretation and Policy
.01 clarifies that willingness of a DPM
to promote the Exchange as a
marketplace includes assisting in
meeting and educating Participants (and
taking the time for travel related
thereto), maintaining communications
with Participants in order to be
responsive to suggestions and
16 Rule 8.2(d) lists the registration costs for the
classes of securities on the Exchange.
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complaints, responding to suggestions
and complaints, and other like
activities.
The Exchange believes that these
obligations will result in additional
liquidity and competitive quoting in the
allocated classes on C2’s market, which
could ultimately lead to additional
order flow directed to the Exchange.
The Exchange believes that these
obligations will strengthen its market
and are reasonable given the benefits
conferred upon DPMs in exchange for
these heightened obligations in the form
of a participation entitlement, as
discussed further below.
Rule 8.18—DPM Financial
Requirements 17
Proposed Rule 8.18 requires each
DPM to maintain net liquidating equity
in its DPM account of not less than
$100,000. It also requires each DPM to
maintain net capital sufficient to
comply with the requirements of Rule
15c3–1 under the Act and requires each
DPM that is a Clearing Participant 18
also to maintain net capital sufficient to
comply with the requirements of The
Options Clearing Corporation.
Additionally, proposed Rule 8.18
requires DPMs to maintain net
liquidating equity in their DPM
accounts in conformity with any
guidelines as the Exchange may
establish from time to time. The
Exchange expects to draft and use DPM
financial guidelines in connection with
the process for allocating securities to
DPMs, and proposed Rule 8.18 would
permit the Exchange to implement and
enforce these guidelines as DPM
financial requirements under Exchange
Rules. The Exchange will announce
these guidelines to Participants by
Regulatory Circular. Although there are
other rules that already subject DPMs to
these financial requirements (and all
Market-Makers must comply with the
Act requirements applicable to
specialists, including financial
requirements), the Exchange believes
that it is worthwhile to also include
these requirements in proposed Rule
8.18 so that the proposed DPM Rules are
more informative and complete.
17 See
CBOE Rule 8.86.
‘‘Clearing Participant’’ means a Permit
Holder that has been admitted to membership in
The Options Clearing Corporation (‘‘OCC’’)
pursuant to the provisions of OCC rules. A ‘‘Permit
Holder’’ means the Exchange recognized holder of
a Trading Permit. A Permit Holder is also known
as a Trading Permit Holder under the Exchange’s
Bylaws. Permit Holders are deemed ‘‘members’’
under the Act. See Rule 1.1.
18 A
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Rule 8.19—Participation Entitlement of
DPMs 19
Rule 6.12 sets forth how the System
prioritizes orders for execution
purposes. Rule 6.12(a)(3) provides that
the Exchange may prioritize orders
using a price-time priority with primary
priority for public customers and
secondary priority for certain trade
participation rights. Proposed Rule 8.19
grants to DPMs a trade participation
right. Proposed Rule 8.19(a) gives the
Exchange authority to determine the
appropriate participation right for DPMs
by providing that the Exchange, subject
to review by the Exchange Board of
Directors, may establish from time to
time a participation entitlement formula
that is applicable to all DPMs.
Proposed Rule 8.19(b)(1) provides
that: (1) A DPM will be entitled to a
participation entitlement only if quoting
at the best bid or offer disseminated on
the Exchange (‘‘BBO’’); (2) a DPM may
not be allocated a total quantity greater
than the quantity that the DPM is
quoting at the BBO; and (3) the
participation entitlement is based on the
number of contracts remaining after all
public customer orders in the Book at
the BBO have been satisfied.
Proposed Rule 8.19(b)(2) provides that
the collective DPM participation
entitlement shall be: 50% when there is
one Market-Maker also quoting at the
BBO and 40% when there are two or
more Market-Makers also quoting at the
BBO. If only the DPM is quoting at the
BBO (with no Market-Makers quoting at
the BBO), the participation entitlement
will not be applicable and the allocation
procedures under Rule 6.12 will apply.
Proposed Rule 8.19(b)(3) provides that
a DPM will not receive its participation
entitlement in trades for which a
Preferred Market-Maker (‘‘PMM’’)
already received a participation
entitlement pursuant to Rule 8.13, based
on the priority determination made by
the Exchange under Rule 6.12. This
provision clarifies that only one trade
participation right may be applied to the
same trade (see the discussion of the
proposed rule change to Rule 6.12(a)
below). For example, if the Exchange
has activated both a PMM participation
right and DPM participation right in a
class and determines under Rule 6.12
that a PMM has higher priority than a
DPM, and a PMM receives its
participation entitlement for a trade,
then a DPM may not receive its
participation entitlement for that trade.
Proposed Rule 8.19, Interpretation
and Policy .01 provides that the
Exchange may also establish a lower
19 See
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DPM participation rate on a product-byproduct basis for newly listed products
or products that are being allocated to
a DPM for the first time. The Exchange
will announce any lower participation
rate to Participants by Regulatory
Circular.
The Exchange believes that DPMs will
play an important role in providing
additional liquidity and more price
competition because of the obligations
imposed on DPMs by the proposed
Rules, as discussed above. The
Exchange also believes that the
proposed participation entitlement,
which DPMs may receive only when
quoting at the best price, is an
appropriate reward for DPMs’
satisfaction of their DPM obligations,
particularly given the overall benefit to
the Exchange’s market and customers
that the additional DPM liquidity will
create. Further, the Exchange believes
that the limited percentage of the
participation entitlement still provides
other market participants with
opportunities to be allocated a
significant number of contracts in trades
in which a DPM receives its
participation entitlement. Similarly, the
Exchange believes it is appropriate to
only allow a PMM or DPM to receive its
participation entitlement for a trade to
further ensure that these opportunities
are available to other market
participants in classes with a DPM or
PMM. While the Exchange believes that
DPMs will add liquidity to the benefit
of the market and customers, it is still
important for all market participations
to engage in price competition on the
Exchange. This participation
entitlement is part of the Exchange’s
careful balancing of the rewards and
obligations of all types of Exchange
Participants, which is part of the overall
market structure designed to encourage
vigorous price competition among
Market-Makers, while still maximizing
the benefits or price competition
resulting from the entry of customer and
non-customer orders, while encouraging
Participants to provide market depth.
Rule 8.20—Termination, Conditioning,
or Limiting Approval to Act as a DPM 20
Proposed Rule 8.20 governs the
termination, conditioning, and limiting
of approval to act as a DPM. Rule 8.20(a)
provides that the Exchange may
terminate, place conditions upon, or
limit a Participant’s approval to act as
a DPM if the Participant: (1) Incurs a
material financial or operational; (2)
fails to comply with any requirements
under Exchange Rules regarding DPM
obligations and responsibilities; or (3) is
20 See
CBOE Rule 8.90.
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no longer eligible to act as DPM or be
allocated a particular security or
securities. Proposed Rule 8.20(a) also
provides that before the Exchange may
take any action to terminate, condition,
or otherwise limit a Participant’s
approval to act as a DPM, the
Participant will be given notice of such
possible action and an opportunity to
present any matter that it wishes the
Exchange to consider in determining
whether to take such action. These
proceedings will be conducted in the
same manner as the Exchange
proceedings concerning DPM approvals
described above.
Proposed Rule 8.20(b) provides an
exception to this provision, which
grants authority to the Exchange to
immediately terminate, condition, or
otherwise limit a Participant’s approval
to act as a DPM if the DPM incurs a
material financial or operational
warranting immediate action or if the
DPM fails to comply with any of the
financial requirements applicable to
DPMs.
In addition, proposed Rule 8.20(c)
provides that limiting a Participant’s
approval to act as a DPM may include,
among other things, limiting or
withdrawing a DPM’s participation
entitlement and withdrawing a DPM’s
right to act as DPM in one or more of
its allocated securities.
As discussed above, it is important for
the Exchange to have the sole authority
to approve a Participant to act as a DPM
(and allocate securities to a DPM) to
ensure that the Participant is able to
satisfy DPM obligations and perform
DPM functions. Similarly, the Exchange
needs authority to terminate, condition,
or limit a DPM’s approval when
necessary to incentive DPMs to meet
their DPM obligations and
responsibilities in order to continue to
receive the corresponding DPM benefits
provided for in the proposed DPM
Rules. In addition, if any of the
circumstances set forth in proposed
Rule 8.20(a) occurs, the Exchange’s
authority to terminate, condition, or
limit a DPM’s approval, and appoint
another DPM if necessary (in the interim
or permanently as discussed above), is
essential to provide for uninterrupted
DPM quoting in appointed classes and
prevent any reduced liquidity in the
DPM’s allocated class that could
otherwise result under these
circumstances.
Proposed Rule 8.20(d) provides that if
a Participant’s approval to act as a DPM
is terminated, conditioned, or otherwise
limited by the Exchange pursuant to
proposed Rule 8.20, the Participant may
appeal that decision to the Appeals
Committee under Chapter 19.
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Additionally, as is described above,
these appeal procedures provide for the
right to a formal Appeals Committee
hearing concerning any such decision,
and the decision of the Appeals
Committee may be appealed to the
Board of Directors. The advanced notice
and appeal procedures are intended to
ensure that DPMs receive appropriate
due process with respect to their
approvals to act as DPMs, as discussed
above.
Rule 8.21—Limitations on Dealings of
DPMs and Affiliated Persons of DPMs 21
Proposed Rule 8.21 provides that a
DPM must maintain information
barriers that are reasonably designed to
prevent the misuse of material, nonpublic information with any affiliates
that may conduct a brokerage business
in option classes allocated to the DPM
or act as a specialist or market-maker in
any security underlying options
allocated to the DPM, and otherwise
comply with the requirements of CBOE
Rule 4.18 (which is incorporated into
the Exchange Rules) regarding the
misuse of material non-public
information. A DPM must provide its
information barriers to the Exchange
and obtain prior written approval. This
provision is meant to prevent a
Participant’s non-DPM businesses from
obtaining any benefits as a result of the
Participant’s status as a DPM.
Rule 6.12—Order Execution and
Priority 22
The proposed rule change amends
Rule 6.12 to ensure that the Exchange’s
order execution and priority rule
contemplates a participation entitlement
for DPMs. The proposed rule change
provides that both PMMs and DPMs
may be granted participation rights up
to the applicable participation right
percentage designated in Rule 8.13 and
8.19, respectively. The Exchange may
activate more than one trade
participation right for an option class
(including at different priority
sequences), however in no case may
more than one trade participation right
be applied on the same trade.23 The
21 See
CBOE Rule 8.91.
CBOE Rules 6.45A(a)(ii)(2) and (iii) and
6.45B(a)(i)(2) and (iii).
23 For example, the Exchange may activate both
the PMM trade participation right of Rule 8.13 and
the DPM trade participation right of Rule 8.20,
along with other priorities that are allowed under
Rule 6.12(a)(3), for an option class at the following
priority levels: Public customer has first priority,
Market Turner (see Rule 6.12(b)(1)) has second
priority, PMM participation right has third priority,
and DPM participation right has fourth priority. If
a PMM’s participation right is applied to a trade,
then the DPM’s participation right cannot be
applied to that trade, and the trade would be
allocated as follows: First to any public customers,
22 See
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proposed rule change provides that, like
for PMMs, (1) a DPM’s order or quote
must be at the best price on the
Exchange; (2) a DPM may not be
allocated a total quantity greater than
the quantity that it is quoting (including
orders not part of quotes) at that price;
(3) in establishing the counterparties to
a particular trade, the DPM’s
participation right must be first counted
against its highest priority bids or offers;
and (4) the DPM’s participation right
will only apply to any remaining
balance of an order once all higher
priorities are satisfied.
The proposed rule change also
amends Rule 6.12 to add paragraph
(b)(2), which will provide for an
additional priority overlay for small
orders that can be applied to each of the
three matching algorithms. If the small
order priority overlay is in effect for an
option class,24 then the following would
apply:
• Orders for five contracts or fewer
will be executed first by the DPM that
is appointed to the option class;
provided, however, that, on a quarterly
basis, the Exchange will evaluate what
percentage of the volume executed on
the Exchange (excluding volume
resulting from the execution of orders in
C2’s Automated Improvement
Mechanism (‘‘AIM’’)—see Rule 6.51) is
comprised of orders for five contracts or
fewer executed by DPMs, and will
reduce the size of the orders included in
this provision if this percentage is over
40%.
• This procedure will only apply to
the allocation of executions among noncustomer orders and Market-Maker
quotes existing in the Book at the time
the Exchange receives the order. No
market participant will be allocated any
portion of an execution unless it has an
existing interest at the execution price.
Moreover, no market participant will be
able to execute a greater number of
contracts than is associated with the
price of its existing interest. As a result,
the small order preference contained in
this allocation procedure will not be a
guarantee; the DPM (1) must be quoting
at the execution price to receive an
allocation of any size, and (2) cannot
second to the Market Turner, third to the PMM’s
participation right, and the remainder to other
orders in price-time priority. However, if a PMM’s
participation right was not applied to the trade,
then the DPM’s participation right could be applied
to the trade, and the trade would be allocated as
follows: First to any public customers, second to the
Market Turner, third to the DPM’s participation
right, and the remainder to other orders in pricetime priority.
24 As set forth in Rule 6.12(b), the Exchange may
determine to apply, on a series-by-series basis, any
additional priority overlays in subparagraph (b) in
a sequence determined by the Exchange.
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execute a greater number of contracts
than the size that is associated with its
quote.
• If a PMM is not quoting at a price
equal to the national best bid or offer
(the ‘‘NBBO’’) at the time a preferred
order is received, the allocation
procedure for small orders described
above will be applied to the execution
of the preferred order (i.e., it will be
executed first by the DPM). If a PMM is
quoting at the NBBO at the time the
preferred order is received, the
allocation procedure in place for all
other sized orders in the class will be
applied to the execution of the preferred
order, except that any Market Turner
status will not apply (e.g., if the default
matching algorithm is price-time with a
public customer and participation
entitlement overlay, the order will
execute first against any public
customer orders, then the PMM would
receive its participation entitlement,
then the remaining balance would be
allocated on a price-time basis).
• The small order priority overlay
will only be applicable to automatic
executions and will not be applicable to
any auctions.25
Lastly, like the existing priority
overlays, the small order priority
overlay is optional. The Exchange will
announce all determinations under this
Rule by Regulatory Circular.
As described above, the Exchange
believes that because DPMs will have
unique obligations to the C2 market,26
they should be provided with certain
participation rights. Under the proposed
DPM Rules in this filing, if the DPM is
one of the Participants with a quote at
the best price, the participation
entitlement will generally equal to 50%
when there is one Market-Maker also
quoting at the BBO or 40% when there
are two or more Market-Makers also
quoting at the BBO.27 This proposed
priority overly [sic] will make available
an allocation procedure that provides
that the DPM has precedence to execute
orders of five contracts or fewer. The
Exchange believes that this small order
priority overlay will not necessarily
result in a significant portion of the
Exchange’s volume being executed by
the DPM. As stated above, the DPM
would execute against these small
25 In addition to AIM, C2 has various electronic
auctions that are described under Rules 6.14,
‘‘Simple Auction Liaison,’’ and 6.52, ‘‘Solicitation
Auction Mechanism.’’ Each of these auctions
generally allocates executions pursuant to the
matching algorithm in effect for the options class
with certain exceptions noted in the respective
rules.
26 See proposed Rule 8.17, ‘‘DPM Obligations.’’
27 See proposed amendment to Rule 6.12(a) and
proposed Rule 8.19, ‘‘Participation Entitlement of
DPMs.’’
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orders only if it is quoting at the best
price, and only for the number of
contracts associated with its quotation.
Nevertheless, the Exchange will
evaluate what percentage of the volume
executed on the Exchange is comprised
of orders for five contracts or fewer
executed by DPMs, and will reduce the
size of the orders included in this
provision if this percentage is over 40%.
C2 considered this small order
priority overlay as part of its balancing
of DPM obligations and benefits
described above and believes this
priority overlay, which includes
participation rights for DPMs only when
they are quoting at the best price, helps
strike an appropriate balance of these
obligations and benefits.
Other Changes
Rule 1.1—Definitions
The proposed rule change amends
Rule 1.1 to define the term ‘‘BBO’’ as the
best bid or offer disseminated on the
Exchange. The Exchange proposes to
include this definition to clarify its
meaning in the Exchange Rules because
the term is used throughout the
proposed DPM Rules as well as other
Exchange Rules.
Rule 17.50—Minor Rule Violation
Plan 28
The proposed rule change also
amends Rule 17.50(g)(14) to add DPM
quoting obligations to the Exchange’s
Minor Rule Violation Plan (‘‘MRVP’’)
provision regarding C2 Market-Maker
quoting obligations. This will allow the
Exchange to impose sanctions upon
DPMs for failing to meet their quoting
obligations pursuant to the MRVP, as it
does for Market-Makers and PMMs. C2
believes these violations are suitable for
inclusion in the MRVP because they are
generally technical in nature, allowing
C2 to carry out its regulatory
responsibilities more quickly and
efficiently with respect to Market-Maker
quoting obligations. For violations of
DPM’s quoting obligations, the
Exchange may assess fines ranging from
$2,000 to $4,000 for a first offense and
$4,000 to $5,000 for a second offense,
and may assess a fine of $5,000 or refer
to C2’s Business Conduct Committee
any subsequent offenses. The Exchange
notes that these fine amounts are the
same as the amounts currently imposed
on Market-Makers for violations of their
quoting obligations under the MRVP.
C2 will maintain internal guidelines
that dictate the sanctions that will be
imposed for a particular violation (based
on the degree of the violation). As with
all other violations in C2’s MRVP, C2
28 See
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will retain the ability to refer a violation
of DPM quoting obligations to its
Business Conduct Committee should the
circumstances warrant this referral.
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.29 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 30 requirements that the rules of
an exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts, to remove impediments to and to
perfect the mechanism for a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
In particular, the Exchange believes
that adopting a DPM program will
protect investors and the public interest,
because it will help generate greater
order flow for the Exchange in
appointed classes and provide
additional incentives for DPMs to trade
with that order flow, which in turn adds
depth and liquidity to C2’s market and
ultimately benefits all market
participants. The Exchange believes this
deeper liquidity will make C2 more
competitive with other markets that
trade those classes, which will also help
remove impediments to and perfect the
mechanism for a free and open market.
Additionally, the Exchange believes
that adopting a DPM program will
promote just and equitable principles of
trade, as it will require DPMs to assist
in the maintenance of a fair and orderly
market, as reasonably practicable, and
maintain net capital consistent with
federal requirements for market-makers.
These proposed Rules impose many
obligations on DPMs, including
continuous two-sided quoting
obligations, which will ensure that
DPMs provide significant liquidity in
their allocated classes to the benefit of
all C2 market participants, and
operational capacity requirements,
which will ensure that DPMs are
capable of carrying out their obligations,
as well as eligibility requirements and
market performance standards. The
proposed Rules also allow the Exchange
to impose conditions on DPMs or their
allocations to further ensure that DPMs
are providing appropriate depth and
liquidity in their allocated classes.
In light of these obligations, the
Exchange also proposed to provide
29 15
30 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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DPMs with the benefit of a participation
entitlement that may receive higher
priority for trades than other
Participants, subject to the requirements
set forth in proposed Rule 8.19(b)(1), as
well as a small order priority overlay,
subject to the requirements set forth in
proposed Rule 6.12(b)(2). While these
trade priorities may reduce the number
of contracts that other Participants may
execute in trades in which the DPM
participation entitlement, or small order
priority overlay is applied, the Exchange
believes this fact is outweighed by the
benefit of the additional liquidity and
more competitive pricing that DPMs
will provide to the market in their
appointed classes, ultimately resulting
in a net benefit to Exchange customers.
These trade priorities are part of the
balancing of C2’s overall market
structure, which is designed to
encourage vigorous price competition
between Market-Makers on the
Exchange, as well as maximize the
benefits of price competition resulting
from the entry of customer and noncustomer orders, while encouraging
Participants to provide market depth.
Therefore, the Exchange believes the
obligations proposed to be imposed on
DPMs are offset by the benefits
proposed to be conferred upon DPMs.
In addition, the Exchange believes
that the approval and allocation
procedures and policies will ensure that
Participants are approved to act as
DPMs and securities traded on the
Exchange are allocated in an equitable
manner, and that all DPMs will have a
fair opportunity for approvals and
allocations based on established criteria
and procedures. The proposed rules that
give the Exchange the authority to
terminate, limit, or condition DPM
approvals or reallocate securities will
allow the Exchange to ensure that its
market maintains an uninterrupted high
level of liquidity for customers in
allocated classes, even when unusual or
changing market circumstances exist.
Further, the Exchange believes that the
advanced notice provisions and appeal
procedures that the proposed rules put
in place for all determinations made by
the Exchange with respect to DPM
approvals and allocations, including
termination and reallocation decisions,
are reasonable procedures that will
create a fair and equitable decisionmaking process with respect to DPMs.
The Exchange believes the proposed
rule change to add violations of DPM
quoting obligation to C2’s MRVP will
strengthen C2’s ability to carry out its
regulatory responsibilities as a selfregulatory organization pursuant to the
Act and reinforce its surveillance and
enforcement functions.
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The Exchange believes that adding the
definition of BBO to the Rules protects
investors and the public interest, as it
clarifies the meaning of this term, which
is used throughout the proposed DPM
Rules and other Exchange Rules, for
investors.
Finally, the Exchange believes that
the proposed rule change is consistent
with the requirements of the Act
because, as the Exchange notes above,
the proposed requirements for DPMs are
based primarily on existing
requirements for DPMs on another
exchange (CBOE).
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.
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
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be 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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–C2–2012–024 on the subject
line.
E:\FR\FM\07SEN1.SGM
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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Notices
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File No.
SR–C2–2012–024. 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
Web site (https://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 such
filing also will be available for
inspection and copying at the principal
office of C2. 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 No. SR–C2–2012–
024 and should be submitted on or
before September 28, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–22059 Filed 9–6–12; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF TRANSPORTATION
srobinson on DSK4SPTVN1PROD with NOTICES
Federal Railroad Administration
Environmental Impact Statement for
the Northeast Corridor Between
Washington, DC, New York, NY, and
Boston, MA
Federal Railroad
Administration (FRA), U.S. Department
of Transportation (DOT).
AGENCY:
31 17
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
17:04 Sep 06, 2012
Notice of intent to extend the
formal comment period for scoping to
October 19, 2012.
ACTION:
Jkt 226001
FRA is issuing this Notice of
Intent (Notice) to advise the public and
Federal, state, and local agencies of the
extension of the formal comment period
for the NEC FUTURE program scoping
process. The Notice of Intent to prepare
a Tier 1 Environmental Impact
Statement (EIS) to evaluate potential
passenger rail improvements between
Washington, DC, New York City, and
Boston, MA was published in the
Federal Register on June 22, 2012. The
formal comment period for scoping was
scheduled to close on Friday, September
14, 2012. In response to requests from
the public provided in public testimony
at Scoping meetings held from August
13th through August 22nd at nine
different venues between Washington,
DC and Boston, Massachusetts, FRA has
decided to extend the formal comment
period until Friday, October 19, 2012.
DATES: Comment period extended from
Friday, September 14, 2012 to Friday,
October 19, 2012.
ADDRESSES: Interested parties are
encouraged to comment on-line at the
NEC FUTURE Web site
(www.necfuture.com), via email at
info@necfuture.com, or by mail at the
address below. For Further Information
or Special Assistance Contact: Rebecca
Reyes-Alicea, USDOT, Federal Railroad
Administration, Office of Railroad
Policy & Development, Mail Stop 20,
1200 New Jersey Avenue SE.,
Washington, DC 20590; by email at
info@necfuture.com; or through the NEC
FUTURE Web site
(www.necfuture.com).
SUPPLEMENTARY INFORMATION: FRA is
leading the planning and environmental
evaluation of the Northeast Corridor
(NEC) in close coordination with the
involved states, Northeast Corridor
Infrastructure and Operations Advisory
Commission (NEC Commission),
Amtrak, and other stakeholders. The
purpose of the NEC FUTURE program is
to define current and future markets for
improved rail service and capacity on
the NEC, develop an integrated
passenger rail transportation solution to
incrementally meet those needs, and
create a regional planning framework to
engage stakeholders throughout the
region in the development of the
program.
The materials that were presented at
the Scoping meetings held from August
13th to August 22nd, including a
narrated PowerPoint presentation and
display boards, will be available on the
NEC FUTURE Web site
SUMMARY:
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
55265
(www.necfuture.com). To ensure that all
significant issues are identified and
considered, all interested parties are
invited to comment on the proposed
scope of environmental review, project
purpose and need, alternatives to be
considered, environmental effects to be
considered and evaluated, and
methodologies to be used for evaluating
effects. Persons with limited internet
access may request a hard copy of the
Public Scoping meeting materials by
contacting Rebecca Reyes-Alicea at the
mailing address above. Please direct
comments or questions concerning the
proposed action and the Tier 1 EIS to
the FRA at the above address.
Issued in Washington, DC, on August 31,
2012.
Paul Nissenbaum,
Associate Administrator of Rail Policy and
Development, Federal Railroad
Administration.
[FR Doc. 2012–22060 Filed 9–6–12; 8:45 am]
BILLING CODE 4910–06–P
DEPARTMENT OF TRANSPORTATION
Federal Transit Administration
Notice of Meeting of the Transit Rail
Advisory Committee for Safety
(TRACS)
AGENCY:
Federal Transit Administration,
DOT.
ACTION:
Notice of meeting.
This notice announces a
public meeting of the Transit Rail
Advisory Committee for Safety
(TRACS). TRACS is a Federal Advisory
Committee established by the Secretary
of Transportation in accordance with
the Federal Advisory Committee Act to
provide information, advice, and
recommendations to the Secretary and
the Federal Transit Administrator on
matters relating to the safety of public
transportation systems.
DATES: The TRACS meeting will be held
on September 20, 2012, from 8:30 a.m.
to 5 p.m., and September 21, 2012, from
8:30 a.m. to 12:00 p.m. Contact Iyon
Rosario (see contact information below)
by September 13, 2012, if you wish to
be added to the visitor’s list to gain
access to the Washington Navy Yard
Conference Center.
ADDRESSES: The meeting will be held at
the Washington Navy Yard Conference
Center (Navy Yard), Building 211, 1454
Parsons Avenue SE., Washington, DC
20374. Attendees who are on the
visitor’s/security list can access all three
gates (6th St, 9th St, 11th St) by
presenting a photo ID to gain entrance
to the Navy Yard. The gate in closest
SUMMARY:
E:\FR\FM\07SEN1.SGM
07SEN1
]]>Agencies
[Federal Register Volume 77, Number 174 (Friday, September 7, 2012)]
[Notices]
[Pages 55257-55265]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22059]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67772; File No. SR-C2-2012-024]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing of a Proposed Rule Change to Adopt a Designated
Primary Market-Maker Program
August 31, 2012.
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 August 21, 2012, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt a Designated Primary Market-Maker
(``DPM'') program. The text of the proposed rule change is available on
the Exchange's Web site (https://www.c2exchange.com/Legal/), at the
Exchange's Office of the Secretary, at the Commission's Web site
(https://www.sec.gov), 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change proposes to adopt a DPM program.\3\ The
Exchange believes the DPM program will encourage deeper liquidity in
allocated classes by imposing obligations on DPMs to attract order flow
to the Exchange in allocated securities and to quote competitively.
These proposed Rules also impose special eligibility requirements and
market performance standards on DPMs. As specialists, DPMs will receive
a trade participation right in their allocated classes in exchange for
their heightened responsibilities.
---------------------------------------------------------------------------
\3\ The proposed rules are based generally on the rules
governing the DPM program on Chicago Board Options Exchange,
Incorporated (``CBOE''), excluding among other things certain
provisions that are inapplicable to C2 (such as provisions related
to floor trading and CBOE-specific provisions) as well as other
provisions that are outdated. See CBOE Rules 6.45A(a)(ii)(2) and
(iii), 6.45B(a)(i)(2) and (iii), 8.80, 8.83-8.91, 8.95, and
17.50(g)(14). See Item 8 of the Form 19b-4 for a discussion of the
differences between the proposed Rules and the corresponding CBOE
rules.
---------------------------------------------------------------------------
DPM Program
Rule 1.1--Definition of DPM 4
The proposed rule change amends Rule 1.1 to adopt a definition of
the term ``Designated Primary Market-Maker'', which is used throughout
the proposed DPM Rules. A DPM is a Participant \5\ organization that is
approved by the Exchange to function in allocated securities as a
Market-Maker and is subject to obligations under proposed Rule 8.17.
The purpose of requiring that a DPM be an organization is to ensure
that each DPM has a formal organizational structure in place to govern
the manner in which it will operate as a DPM. The Exchange believes it
is essential that it have the sole authority to approve a Participant
organization to act as a DPM to ensure that the Participant
organization satisfies the eligibility requirements set forth in
proposed Rule 8.14 and the financial requirements set forth in proposed
Rule 8.18, and can otherwise meet the obligations and responsibilities
of a DPM set forth in proposed Rule 8.17.
---------------------------------------------------------------------------
\4\ See CBOE Rule 8.80(a).
\5\ A ``Participant'' is an Exchange-recognized holder of a
Trading Permit, which is an Exchange-issued permit that confers the
ability to transact on the Exchange. See Rule 1.1.
---------------------------------------------------------------------------
Rule 8.14--Approval to Act as a DPM 6
Proposed Rule 8.14 addresses the DPM approval process. To act as a
DPM, a Participant must file an application with the Exchange on such
forms as the Exchange may prescribe. The Exchange will determine the
appropriate number of approved DPMs. The Exchange will make each DPM
approval from among the DPM applications on file with the Exchange,
based on the Exchange's judgment as to which applicant is best able to
perform the functions of a DPM. The factors the Exchange may consider
when making this selection include, but are not limited to, any one or
more of the following:
---------------------------------------------------------------------------
\6\ See CBOE Rules 8.83, 8.88, and 8.89.
---------------------------------------------------------------------------
(1) Adequacy of capital;
(2) operational capacity;
(3) trading experience of and observance of generally accepted
standards of conduct by the applicant and its associated persons;
(4) regulatory history of and history of adherence to Exchange
Rules by the applicant and its associated persons; and
(5) willingness and ability of the applicant and its associated
persons to promote the Exchange as a marketplace.
The following are some examples of the many ways in which the
Exchange may consider these factors:
In considering adequacy of capital of an applicant, the
Exchange may look at whether the applicant meets the financial
requirements set forth in proposed Rule 8.18 and whether it otherwise
has the resources to meet the heightened responsibilities.
In considering operational capacity of an applicant, the
Exchange may look to criteria such as the number of Market-Makers or
personnel and the ability to process order flow in determining whether
it would be able to satisfy the DPM obligations in an efficient manner.
[[Page 55258]]
In considering trading experience of and observance of
generally accepted standards of conduct by the applicant and its
associated persons, the Exchange may look at the applicant's and its
associated persons' history at the Exchange or in the industry, the
trading volume of the applicant and its associated persons, and market
performance reviews in determining whether the applicant would be able
to meet the DPM market performance standards.
In considering the regulatory history of and history of
adherence to Exchange Rules by the applicant and its associated
persons, the Exchange may look to whether the applicant or its
associated persons have been found to have violated Exchange rules or
have been subject to any enforcement proceedings in determining whether
the applicant and its associated persons would comply with obligations
imposed by the DPM Rules and other Rules of the Exchange, as well as
federal securities laws and regulations.
In considering willingness and ability of the applicant
and its associated persons to promote the Exchange as a marketplace,
the Exchange may look at whether the applicant has engaged (or how it
intends to engage) in activities such as assisting in meeting and
educating market participants, maintaining communications with
Participants in order to be responsive to suggestions and complaints,
and responding to suggestions and complaints in determining whether the
applicant could bring order flow to the Exchange.
These are the primary factors that the Exchange believes are
necessary for it to consider when determining whether a DPM applicant
is able to meet the DPM obligations, responsibilities, and market
performance standards imposed by the proposed DPM Rules. Given that the
Exchange may limit the number of approved DPMs, it is important that
the Exchange can reasonably determine that the Participants it approves
to act as DPMs will increase liquidity and quote competitively in order
to attract order flow as intended by the proposed DPM program.
Each applicant for approval as a DPM will have an opportunity to
present any matter that it wishes the Exchange to consider in
conjunction with the approval decision. The Exchange may require that a
presentation be solely or partially in writing, and may require the
submission of additional information from the applicant or its
associated persons. Formal rules of evidence will not apply to these
proceedings. This opportunity will allow a DPM applicant to ensure that
the Exchange considers all information that the DPM applicant deems
relevant, in addition to the standard information described by the
factors above that the Exchange reviews. The Exchange believes the
presentation of this information, in addition to the information
requested by the Exchange, will result in fair and fully informed
decisions by the Exchange during the DPM approval process.
In selecting an applicant for approval as a DPM, the Exchange may
place one or more conditions on the approval, including but not limited
to conditions concerning the capital or operations of or persons
associated with the DPM applicant, and the number or type of securities
that may be allocated to the applicant. Depending on the circumstances
surrounding a specific DPM applicant, the Exchange believes it is
necessary to have the ability to impose conditions on the specific DPM
approval in addition to the obligations otherwise imposed by the DPM
Rules as an additional means to ensure that the DPM applicant is able
to adequately perform the DPM functions.
Each DPM will retain its approval to act as a DPM for one year,
unless the Exchange relieves the DPM of its approval and obligations to
act as a DPM or earlier terminates the DPM's approval to act as a DPM
pursuant to proposed Rule 8.20. After each one-year term, a DPM may
file an application with the Exchange to renew its approval to act as a
DPM on forms prescribed by the Exchange, which renewal application the
Exchange may approve or disapprove in its sole discretion in the same
manner and based on the same factors set forth in proposed Rule 8.14(b)
through (d), and any other factors the Exchange deems relevant
(including an evaluation of the extent to which the DPM has satisfied
its obligations under proposed Rule 8.17). Because the proposed rule
change provides that the Exchange will determine the appropriate number
of approved DPMs in a class, the Exchange believes that having
temporary DPM appointments will provide all Participants with regular
opportunities to be selected as DPMs by the Exchange rather than allow
certain Participants to have perpetual DPM appointments.
If the Exchange terminates or otherwise limits its approval for a
Participant to act as a DPM, the Exchange may do one or both of the
following: (1) Approve a DPM on an interim basis, pending the final
approval of a new DPM; and (2) allocate on an interim basis to another
DPM(s) the securities that were allocated to the affected DPM, pending
a final allocation of the securities pursuant to proposed Rule 8.15 (as
described below). Neither an interim approval nor allocation will be
viewed as a prejudgment with respect to the final approval or
allocation. Interim approvals and allocations will provide
uninterrupted DPM quoting in appointed classes and prevent any reduced
liquidity in those classes that could otherwise result from a
termination, condition, or limit on a DPM's approval or allocation.
Proposed Rule 8.14(g) provides that DPM appointments may not be
sold, assigned, or otherwise transferred without prior written approval
of the Exchange. This provision clarifies that only the Exchange may
authorize a firm to act as a DPM, which will allow the Exchange to
ensure that a Participant is qualified to adequately perform DPM
functions and fulfill its obligations and responsibilities as a DPM
under the proposed DPM Rules.
Rule 8.15--Allocation of Securities to DPMs 7
Proposed Rule 8.15 sets forth the manner in which the Exchange will
allocate securities to DPMs. Proposed Rule 8.15(a) provides that the
Exchange will determine for each security traded on the Exchange
whether the security should be allocated to a DPM and, if so, to which
DPM the security should be allocated. The proposed rule change could
produce additional quotation volume in classes that are allocated to
DPMs. The Exchange maintains a rigorous capacity planning program that
monitors system performance and projected capacity demands and, as a
general matter, considers the potential system capacity impact of all
new initiatives. The Exchange has analyzed the potential for additional
quote traffic resulting from the addition of DPMs and has concluded
that the Exchange has sufficient system capacity to handle those
additional quotes without degrading the performance of its systems. The
Exchange also notes that any additional quote traffic will be limited,
as the Exchange may allocate securities to DPMs on a class-by-class
basis as opposed to allocating all classes to DPMs. Ultimately, the
Exchange believes that it has the necessary systems capacity to
allocate option classes to DPMs as described in this proposed rule
change. The Exchange will monitor quoting volume associated with DPMs
and its effect on C2's systems.
---------------------------------------------------------------------------
\7\ See CBOE Rule 8.95.
---------------------------------------------------------------------------
Proposed Rule 8.15(b) describes the criteria that the Exchange may
consider in making allocation determinations.
[[Page 55259]]
The factors the Exchange may consider when making these determinations
include, but are not limited to, any one or more of the following:
Performance, volume, capacity, market performance commitments,
operational factors, efficiency, competitiveness, environment in which
the security will be traded, expressed preferences of issuers, and
recommendations of any Exchange committees. The following are some
examples of the many ways in which these criteria may be applied:
In considering performance, the Exchange may look at the
market performance ranking of the applicable DPMs, as established by
market performance reviews that are conducted by the Exchange.
In considering volume, the Exchange may look at the
anticipated trading volume of the security and the trading volume
attributable to the applicable DPMs in determining which DPMs would be
best able to handle the additional volume.
In considering capacity, operational factors, and
efficiency, the Exchange may look to criteria such as the number of
Market-Makers or DPM personnel, the ability to process order flow, and
the amount of DPM capital in determining which DPMs would be best able
to handle additional securities.
In considering marketing performance commitments, the
Exchange may look at the pledges a DPM has made with respect to how
narrow its bid-ask spreads will be and the number of contracts for
which it will honor its disseminated market quotations beyond what is
required by Exchange Rules.
In considering competitiveness, the Exchange may look at
percentage of volume attributable to a DPM in allocated securities that
are multiply listed.
In considering the environment in which the security will
be traded, the Exchange may seek a proportionate distribution of
securities between the Market-Maker system and the DPM system and
across different DPMs.
In considering expressed preferences of issuers, the
Exchange may consider the views of the issuer of a security traded on
the Exchange with respect to the allocation of that security or to the
licensor of an index on which an index option is based with respect to
the allocation of that index option.
The Exchange may consider the recommendation of any
Exchange committees, particularly those that evaluate DPM market
performance.
Proposed Rule 8.15(c) provides that the Exchange may remove an
allocation and reallocate the applicable security during a DPM's term
if the DPM fails to adhere to any market performance commitments made
by the DPM in connection with receiving the allocation. The Exchange
typically requests that DPMs make market performance commitments as
part of their applications to receive allocations of particular
securities. As described above, these commitments may relate to pledges
to keep bid-ask spreads within a particular width or to make
disseminated quotes firm for a designated number of contracts beyond
what is required by Exchange Rules. Proposed Rule 8.15(c) permits the
Exchange to remove an allocation if these commitments are not met,
which the Exchange believes will incentive [sic] DPMs to abide by these
commitments. The Exchange believes these types of commitments will be
instrumental in causing DPMs to quote more competitively.
Proposed Rule 8.15(c) also provides that the Exchange may change an
allocation determination if it concludes that doing so is in the best
interests of the Exchange based on operational factors or efficiency.
For example, if, due to market conditions, trading volume in a security
greatly increased over a very short time frame and the DPM allocated
that security could not handle the additional order flow, the Exchange
may deem it necessary to reallocate the security to another DPM with
the capacity to do so. This provision will allow the Exchange to ensure
that there is sufficient liquidity during trading hours in the
allocated option classes.
Proposed Rule 8.15(d) provides that prior to taking any action to
remove an allocation, the Exchange will generally give the DPM prior
notice of the contemplated action and an opportunity to be heard
concerning the action. The only exception to this requirement would be
in those unusual situations when expeditious action is required due to
extreme market volatility or some other situation requiring emergency
action. Specifically, except when expeditious action is required,
proposed Rule 8.15(d) requires that prior to taking any action to
remove an allocation, the Exchange must notify the DPM involved of the
reasons the Exchange is considering taking the contemplated action, and
will either convene one or more informal meetings with the DPM to
discuss the matter, or provide the DPM with the opportunity to submit a
written statement to the Exchange concerning the matter. Due to the
informal nature of the meetings provided for under proposed Rule
8.15(d) and in order to encourage constructive communication between
the Exchange and the affected DPM at those meetings, ordinarily neither
counsel for the Exchange nor counsel for the DPM will be invited to
attend these meetings and no verbatim record of the meetings will be
kept.
As with any decision made by the Exchange, any person adversely
affected by a decision made by the Exchange to remove an allocation may
appeal the decision to the Exchange under Chapter 19 of the Exchange
Rules. The appeal procedures in Chapter 19 provide for the right to a
formal hearing concerning any such decision and for the right to be
accompanied, represented, and advised by counsel at all stages of the
proceeding. In addition, any decision of the Exchange's Appeals
Committee may be appealed to the Board of Directors pursuant to CBOE
Rule 19.5 (which is incorporated into the Exchange Rules). The Exchange
believes these hearing and appeal procedures will provide DPMs with
appropriate due process with respect to decisions made regarding their
DPM allocations and will promote a fair and fully informed decision-
making process.
Proposed Rule 8.15(e) provides that the allocation of a security to
a DPM does not convey ownership rights in the allocation or in the
order flow associated with the allocation. Proposed Rule 8.15(e) is
intended to make clear that DPMs may not buy, sell, or otherwise
transfer an allocation and that, instead, the Exchange has the sole
authority to determine allocations. As discussed above, DPM
appointments may only be transferred with Exchange approval pursuant to
proposed Rule 8.14(g).
Proposed Rule 8.15(f) provides that in allocating and reallocating
securities to DPMs, the Exchange will act in accordance with any
limitation or restriction on the allocation of securities that is
established pursuant to another Exchange Rule. For example, the
Exchange may take remedial action against a DPM for failure to satisfy
minimum market performance standards, and such action may involve a
restriction related to the allocation of securities to that DPM.
Similarly, the Exchange may place restrictions on a DPM's ability to
receive or retain allocations of securities pursuant to various
provisions of these proposed Rules, including as a condition of
appointment as a DPM (proposed Rule 8.14(d)), due to failure to perform
DPM functions (proposed Rule 8.20(a)(2)), or due to a material
financial or operational change (proposed Rule 8.20)(a)(1)). Proposed
Rule 8.15(f) is intended to make clear that the
[[Page 55260]]
Exchange must act in accordance with any of these restrictions in
making allocation determinations.
Proposed Rule 8.15, Interpretation and Policy .01 generally
provides that the Exchange may reallocate a security at the end of a
DPM's one-year term, in the event that the security is removed pursuant
to another Exchange Rule from the DPM to which the security has been
allocated, or in the event that for some other reason the DPM to which
the security has been allocated no longer retains the allocation. For
example, at the end of a DPM's term, the Exchange may allocate the
security to the same DPM again (if the DPM applied for its appointment
to be renewed and the Exchange approved the renewal application), to
another DPM, or to no DPM. As another example, as described above, the
Exchange may take remedial actions against DPMs in specified
circumstances, including the removal of an allocation. Proposed Rule
8.15, Interpretation and Policy .01 is intended to clarify that in the
event the Exchange removes an allocation pursuant to Exchange Rules,
the Exchange will reallocate the security pursuant to proposed Rule
8.15. The only exception to this provision is that the Exchange is
authorized pursuant to proposed Rule 8.14(f) to allocate to an interim
DPM on a temporary basis a security that is removed from another DPM
until the Exchange has made a final allocation of the security. As with
several other proposed Rules, this provision is intended allow the
Exchange to ensure that there is sufficient liquidity in allocated
classes despite changing circumstances.
Rule 8.16--Conditions on the Allocation of Securities to DPMs \8\
---------------------------------------------------------------------------
\8\ See CBOE Rule 8.84.
---------------------------------------------------------------------------
Proposed Rule 8.16 allows the Exchange to establish (1)
restrictions applicable to all DPMs on the concentration of securities
allocable to a single DPM and to affiliated DPMs and (2) minimum
eligibility standards applicable to all DPMs, which must be satisfied
in order for a DPM to receive allocations of securities, including but
not limited to standards relating to adequacy of capital and
operational capacity (including number of personnel). Among the reasons
for granting the Exchange the authority to limit the concentration of
securities allocable to a single DPM and to affiliated DPMs is to
promote competition in the Exchange's market and to help ensure that no
DPM or group of affiliated DPMs is allocated such a large number of
securities that it would be difficult for the Exchange to quickly
reallocate those securities to other DPMs or Market-Makers in the event
that for some reason the DPM or group of affiliated DPMs were no longer
able to perform in that capacity. Among the reasons for granting the
Exchange the authority to establish minimum eligibility standards for
DPMs to receive allocations of securities is to help ensure that a DPM
has the financial and operational ability to handle additional
allocations of securities and meet its DPM obligations with respect to
those securities. Similarly, the Exchange may utilize this proposed
Rule to establish specific minimum market performance standards that
must be satisfied by DPMs in order to receive allocations of securities
so that a DPM that is not performing adequately with respect to the
securities that have already been allocated to the DPM is not allocated
additional securities.
Rule 8.17--DPM Obligations \9\
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\9\ See CBOE Rule 8.85.
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Proposed Rule 8.17 describes the obligations of a DPM. Proposed
Rule 8.17(a) includes the general obligation with respect to each of
its allocated securities to fulfill all of the obligations of a Market-
Maker under Exchange Rules in addition to the requirements set forth in
this proposed Rule.\10\ Proposed Rule 8.17(a) requires each DPM:
---------------------------------------------------------------------------
\10\ To the extent there is any inconsistency between the
specific obligations of a DPM set forth in proposed Rule 8.17 and
the general obligations of a Market-Maker under the Exchange Rules,
proposed Rule 8.17 will govern.
---------------------------------------------------------------------------
(1) To provide continuous quotes in at least the lesser of 99% of
the non-adjusted option series (as defined in Rule 8.5(a)(1)) or 100%
of the non-adjusted option series minus one call-put pair of each
option class allocated to it, with the term ``call-put pair'' referring
to one call and one put that cover the same underlying instrument and
have the same expiration date and exercise price, and assure that its
disseminated market quotations are accurate; \11\
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\11\ For purposes of this provision, ``continuous'' means 90% of
the time. If a technical failure or limitation of the System
prevents a DPM from maintaining, or from communicating to the
Exchange, timely and accurate quotes in a series, the duration of
such failure will not be considered in determining whether that that
[sic] DPM has satisfied the 99% quoting standard with respect to the
series.
---------------------------------------------------------------------------
(2) to assure that each of its displayed market quotations are for
the number of contracts required by Rule 8.6(a), ``Market-Maker Firm
Quotes'';
(3) to segregate in a manner prescribed by the Exchange (a) all
transactions consummated by the DPM in securities allocated to the DPM
and (b) any other transactions consummated by or on behalf of the DPM
that are related to the DPM's DPM business; \12\
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\12\ This will permit the Exchange to monitor each DPM's trading
positions in order to ensure that the DPM is in compliance with the
financial and other requirements that are applicable DPMs.
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(4) to not initiate a transaction for the DPM's own account that
would result in putting into effect any stop or stop limit order that
may be in the Book \13\ and when the DPM guarantees that the stop or
stop limit order will be executed at the same price as the electing
transaction; \14\ and
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\13\ The term ``Book'' means the electronic book of buy and sell
orders and quotes maintained by the System. The ``System'' is the
automated trading system used by the Exchange for the trading of
options contracts. See Rule 1.1.
\14\ These restrictions apply to stop or stop limit orders only
if the terms of such orders are visible to the DPM or if such orders
are handled by the DPM.
---------------------------------------------------------------------------
(5) to ensure that a trading rotation is initiated promptly
following the opening of the underlying security (or promptly after
8:30 a.m. Central Time in an index class) in accordance with Rule 6.11
in 100% of the series of each allocated class by entering opening
quotes as necessary.
Proposed Rule 8.17(b) provides that a DPM may not represent
discretionary orders as an agent in its allocated classes.
Proposed Rule 8.17(c) lists additional obligations of a DPM,
including that a DPM must:
(1) Resolve disputes relating to transactions in the securities
allocated to the DPM, subject to Exchange official review, upon the
request of any party to the dispute;
(2) make competitive markets on the Exchange and otherwise promote
the Exchange in a manner that is likely to enhance the ability of the
Exchange to compete successfully for order flow in the classes it
trades;
(3) promptly inform the Exchange of any material change in the
financial or operational condition of the DPM;
(4) supervise all persons associated with the DPM to assure
compliance with the Exchange Rules;
(5) segregate in a manner prescribed by the Exchange the DPM's
business and activities as a DPM from the DPM's other business and
activities; \15\ and
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\15\ This requirement will help reduce the risk that a DPM's
financial integrity will be adversely impacted by financial losses
that may be incurred by the DPM in connection with its other
businesses and activities.
---------------------------------------------------------------------------
(6) continue to act as a DPM and to fulfill all of the DPM's
obligations as a DPM until its DPM appointment has lapsed, the Exchange
relieves the DPM
[[Page 55261]]
of its approval and obligations to act as a DPM, or the Exchange
terminates the DPM's approval to act as a DPM pursuant to proposed Rule
8.20.
Proposed Rule 8.17(d) provides that each person associated with a
DPM will be obligated to comply with the provisions of proposed Rule
8.17(a) through (c) when acting on behalf of the DPM.
Proposed Rule 8.17(e) provides that each DPM must hold the number
of Trading Permits as may be necessary based on the aggregate
``registration cost'' for the classes allocated to the DPM. Each
Trading Permit held by the DPM has a registration cost of 1.0.\16\ For
example, if the Exchange allocates to a DPM classes with an aggregate
registration cost of 1.6, the DPM would be required to hold two Trading
Permits. The Exchange may change at any time the registration cost of
any option class; upon any such change, each DPM will be required to
hold the appropriate number of Trading Permits reflecting the revised
registration costs of the classes that have been allocated to it.
Additionally, a DPM is required to hold the appropriate number of
Trading Permits at the time a new option class is allocated to it
pursuant to proposed Rule 8.16 begins trading.
---------------------------------------------------------------------------
\16\ Rule 8.2(d) lists the registration costs for the classes of
securities on the Exchange.
---------------------------------------------------------------------------
In the event a Participant approved as a DPM is also approved to
act as a Market-Maker and has excess Trading Permit capacity above the
aggregate registration cost for the classes allocated to it as the DPM,
the Participant may utilize the excess Trading Permit capacity to quote
in an appropriate number of classes in the capacity of a Market-Maker.
For example, if the DPM has been allocated a number of option classes
with an aggregate registration cost of 1.6, the Participant could
request an appointment as a Market-Maker in any combination of option
classes whose aggregate registration cost does not exceed 0.40. The
Participant will not function as a DPM in any of these additional
classes. In the event the Participant utilizes any excess Trading
Permit capacity to quote in some additional classes as a Market-Maker,
it must comply with the provisions of Rule 8.2.
Rule 8.17, Interpretation and Policy .01 clarifies that willingness
of a DPM to promote the Exchange as a marketplace includes assisting in
meeting and educating Participants (and taking the time for travel
related thereto), maintaining communications with Participants in order
to be responsive to suggestions and complaints, responding to
suggestions and complaints, and other like activities.
The Exchange believes that these obligations will result in
additional liquidity and competitive quoting in the allocated classes
on C2's market, which could ultimately lead to additional order flow
directed to the Exchange. The Exchange believes that these obligations
will strengthen its market and are reasonable given the benefits
conferred upon DPMs in exchange for these heightened obligations in the
form of a participation entitlement, as discussed further below.
Rule 8.18--DPM Financial Requirements \17\
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\17\ See CBOE Rule 8.86.
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Proposed Rule 8.18 requires each DPM to maintain net liquidating
equity in its DPM account of not less than $100,000. It also requires
each DPM to maintain net capital sufficient to comply with the
requirements of Rule 15c3-1 under the Act and requires each DPM that is
a Clearing Participant \18\ also to maintain net capital sufficient to
comply with the requirements of The Options Clearing Corporation.
Additionally, proposed Rule 8.18 requires DPMs to maintain net
liquidating equity in their DPM accounts in conformity with any
guidelines as the Exchange may establish from time to time. The
Exchange expects to draft and use DPM financial guidelines in
connection with the process for allocating securities to DPMs, and
proposed Rule 8.18 would permit the Exchange to implement and enforce
these guidelines as DPM financial requirements under Exchange Rules.
The Exchange will announce these guidelines to Participants by
Regulatory Circular. Although there are other rules that already
subject DPMs to these financial requirements (and all Market-Makers
must comply with the Act requirements applicable to specialists,
including financial requirements), the Exchange believes that it is
worthwhile to also include these requirements in proposed Rule 8.18 so
that the proposed DPM Rules are more informative and complete.
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\18\ A ``Clearing Participant'' means a Permit Holder that has
been admitted to membership in The Options Clearing Corporation
(``OCC'') pursuant to the provisions of OCC rules. A ``Permit
Holder'' means the Exchange recognized holder of a Trading Permit. A
Permit Holder is also known as a Trading Permit Holder under the
Exchange's Bylaws. Permit Holders are deemed ``members'' under the
Act. See Rule 1.1.
---------------------------------------------------------------------------
Rule 8.19--Participation Entitlement of DPMs \19\
---------------------------------------------------------------------------
\19\ See CBOE Rule 8.90 [sic].
---------------------------------------------------------------------------
Rule 6.12 sets forth how the System prioritizes orders for
execution purposes. Rule 6.12(a)(3) provides that the Exchange may
prioritize orders using a price-time priority with primary priority for
public customers and secondary priority for certain trade participation
rights. Proposed Rule 8.19 grants to DPMs a trade participation right.
Proposed Rule 8.19(a) gives the Exchange authority to determine the
appropriate participation right for DPMs by providing that the
Exchange, subject to review by the Exchange Board of Directors, may
establish from time to time a participation entitlement formula that is
applicable to all DPMs.
Proposed Rule 8.19(b)(1) provides that: (1) A DPM will be entitled
to a participation entitlement only if quoting at the best bid or offer
disseminated on the Exchange (``BBO''); (2) a DPM may not be allocated
a total quantity greater than the quantity that the DPM is quoting at
the BBO; and (3) the participation entitlement is based on the number
of contracts remaining after all public customer orders in the Book at
the BBO have been satisfied.
Proposed Rule 8.19(b)(2) provides that the collective DPM
participation entitlement shall be: 50% when there is one Market-Maker
also quoting at the BBO and 40% when there are two or more Market-
Makers also quoting at the BBO. If only the DPM is quoting at the BBO
(with no Market-Makers quoting at the BBO), the participation
entitlement will not be applicable and the allocation procedures under
Rule 6.12 will apply.
Proposed Rule 8.19(b)(3) provides that a DPM will not receive its
participation entitlement in trades for which a Preferred Market-Maker
(``PMM'') already received a participation entitlement pursuant to Rule
8.13, based on the priority determination made by the Exchange under
Rule 6.12. This provision clarifies that only one trade participation
right may be applied to the same trade (see the discussion of the
proposed rule change to Rule 6.12(a) below). For example, if the
Exchange has activated both a PMM participation right and DPM
participation right in a class and determines under Rule 6.12 that a
PMM has higher priority than a DPM, and a PMM receives its
participation entitlement for a trade, then a DPM may not receive its
participation entitlement for that trade.
Proposed Rule 8.19, Interpretation and Policy .01 provides that the
Exchange may also establish a lower
[[Page 55262]]
DPM participation rate on a product-by-product basis for newly listed
products or products that are being allocated to a DPM for the first
time. The Exchange will announce any lower participation rate to
Participants by Regulatory Circular.
The Exchange believes that DPMs will play an important role in
providing additional liquidity and more price competition because of
the obligations imposed on DPMs by the proposed Rules, as discussed
above. The Exchange also believes that the proposed participation
entitlement, which DPMs may receive only when quoting at the best
price, is an appropriate reward for DPMs' satisfaction of their DPM
obligations, particularly given the overall benefit to the Exchange's
market and customers that the additional DPM liquidity will create.
Further, the Exchange believes that the limited percentage of the
participation entitlement still provides other market participants with
opportunities to be allocated a significant number of contracts in
trades in which a DPM receives its participation entitlement.
Similarly, the Exchange believes it is appropriate to only allow a PMM
or DPM to receive its participation entitlement for a trade to further
ensure that these opportunities are available to other market
participants in classes with a DPM or PMM. While the Exchange believes
that DPMs will add liquidity to the benefit of the market and
customers, it is still important for all market participations to
engage in price competition on the Exchange. This participation
entitlement is part of the Exchange's careful balancing of the rewards
and obligations of all types of Exchange Participants, which is part of
the overall market structure designed to encourage vigorous price
competition among Market-Makers, while still maximizing the benefits or
price competition resulting from the entry of customer and non-customer
orders, while encouraging Participants to provide market depth.
Rule 8.20--Termination, Conditioning, or Limiting Approval to Act as a
DPM \20\
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\20\ See CBOE Rule 8.90.
---------------------------------------------------------------------------
Proposed Rule 8.20 governs the termination, conditioning, and
limiting of approval to act as a DPM. Rule 8.20(a) provides that the
Exchange may terminate, place conditions upon, or limit a Participant's
approval to act as a DPM if the Participant: (1) Incurs a material
financial or operational; (2) fails to comply with any requirements
under Exchange Rules regarding DPM obligations and responsibilities; or
(3) is no longer eligible to act as DPM or be allocated a particular
security or securities. Proposed Rule 8.20(a) also provides that before
the Exchange may take any action to terminate, condition, or otherwise
limit a Participant's approval to act as a DPM, the Participant will be
given notice of such possible action and an opportunity to present any
matter that it wishes the Exchange to consider in determining whether
to take such action. These proceedings will be conducted in the same
manner as the Exchange proceedings concerning DPM approvals described
above.
Proposed Rule 8.20(b) provides an exception to this provision,
which grants authority to the Exchange to immediately terminate,
condition, or otherwise limit a Participant's approval to act as a DPM
if the DPM incurs a material financial or operational warranting
immediate action or if the DPM fails to comply with any of the
financial requirements applicable to DPMs.
In addition, proposed Rule 8.20(c) provides that limiting a
Participant's approval to act as a DPM may include, among other things,
limiting or withdrawing a DPM's participation entitlement and
withdrawing a DPM's right to act as DPM in one or more of its allocated
securities.
As discussed above, it is important for the Exchange to have the
sole authority to approve a Participant to act as a DPM (and allocate
securities to a DPM) to ensure that the Participant is able to satisfy
DPM obligations and perform DPM functions. Similarly, the Exchange
needs authority to terminate, condition, or limit a DPM's approval when
necessary to incentive DPMs to meet their DPM obligations and
responsibilities in order to continue to receive the corresponding DPM
benefits provided for in the proposed DPM Rules. In addition, if any of
the circumstances set forth in proposed Rule 8.20(a) occurs, the
Exchange's authority to terminate, condition, or limit a DPM's
approval, and appoint another DPM if necessary (in the interim or
permanently as discussed above), is essential to provide for
uninterrupted DPM quoting in appointed classes and prevent any reduced
liquidity in the DPM's allocated class that could otherwise result
under these circumstances.
Proposed Rule 8.20(d) provides that if a Participant's approval to
act as a DPM is terminated, conditioned, or otherwise limited by the
Exchange pursuant to proposed Rule 8.20, the Participant may appeal
that decision to the Appeals Committee under Chapter 19. Additionally,
as is described above, these appeal procedures provide for the right to
a formal Appeals Committee hearing concerning any such decision, and
the decision of the Appeals Committee may be appealed to the Board of
Directors. The advanced notice and appeal procedures are intended to
ensure that DPMs receive appropriate due process with respect to their
approvals to act as DPMs, as discussed above.
Rule 8.21--Limitations on Dealings of DPMs and Affiliated Persons of
DPMs \21\
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\21\ See CBOE Rule 8.91.
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Proposed Rule 8.21 provides that a DPM must maintain information
barriers that are reasonably designed to prevent the misuse of
material, non-public information with any affiliates that may conduct a
brokerage business in option classes allocated to the DPM or act as a
specialist or market-maker in any security underlying options allocated
to the DPM, and otherwise comply with the requirements of CBOE Rule
4.18 (which is incorporated into the Exchange Rules) regarding the
misuse of material non-public information. A DPM must provide its
information barriers to the Exchange and obtain prior written approval.
This provision is meant to prevent a Participant's non-DPM businesses
from obtaining any benefits as a result of the Participant's status as
a DPM.
Rule 6.12--Order Execution and Priority \22\
---------------------------------------------------------------------------
\22\ See CBOE Rules 6.45A(a)(ii)(2) and (iii) and 6.45B(a)(i)(2)
and (iii).
---------------------------------------------------------------------------
The proposed rule change amends Rule 6.12 to ensure that the
Exchange's order execution and priority rule contemplates a
participation entitlement for DPMs. The proposed rule change provides
that both PMMs and DPMs may be granted participation rights up to the
applicable participation right percentage designated in Rule 8.13 and
8.19, respectively. The Exchange may activate more than one trade
participation right for an option class (including at different
priority sequences), however in no case may more than one trade
participation right be applied on the same trade.\23\ The
[[Page 55263]]
proposed rule change provides that, like for PMMs, (1) a DPM's order or
quote must be at the best price on the Exchange; (2) a DPM may not be
allocated a total quantity greater than the quantity that it is quoting
(including orders not part of quotes) at that price; (3) in
establishing the counterparties to a particular trade, the DPM's
participation right must be first counted against its highest priority
bids or offers; and (4) the DPM's participation right will only apply
to any remaining balance of an order once all higher priorities are
satisfied.
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\23\ For example, the Exchange may activate both the PMM trade
participation right of Rule 8.13 and the DPM trade participation
right of Rule 8.20, along with other priorities that are allowed
under Rule 6.12(a)(3), for an option class at the following priority
levels: Public customer has first priority, Market Turner (see Rule
6.12(b)(1)) has second priority, PMM participation right has third
priority, and DPM participation right has fourth priority. If a
PMM's participation right is applied to a trade, then the DPM's
participation right cannot be applied to that trade, and the trade
would be allocated as follows: First to any public customers, second
to the Market Turner, third to the PMM's participation right, and
the remainder to other orders in price-time priority. However, if a
PMM's participation right was not applied to the trade, then the
DPM's participation right could be applied to the trade, and the
trade would be allocated as follows: First to any public customers,
second to the Market Turner, third to the DPM's participation right,
and the remainder to other orders in price-time priority.
---------------------------------------------------------------------------
The proposed rule change also amends Rule 6.12 to add paragraph
(b)(2), which will provide for an additional priority overlay for small
orders that can be applied to each of the three matching algorithms. If
the small order priority overlay is in effect for an option class,\24\
then the following would apply:
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\24\ As set forth in Rule 6.12(b), the Exchange may determine to
apply, on a series-by-series basis, any additional priority overlays
in subparagraph (b) in a sequence determined by the Exchange.
---------------------------------------------------------------------------
Orders for five contracts or fewer will be executed first
by the DPM that is appointed to the option class; provided, however,
that, on a quarterly basis, the Exchange will evaluate what percentage
of the volume executed on the Exchange (excluding volume resulting from
the execution of orders in C2's Automated Improvement Mechanism
(``AIM'')--see Rule 6.51) is comprised of orders for five contracts or
fewer executed by DPMs, and will reduce the size of the orders included
in this provision if this percentage is over 40%.
This procedure will only apply to the allocation of
executions among non-customer orders and Market-Maker quotes existing
in the Book at the time the Exchange receives the order. No market
participant will be allocated any portion of an execution unless it has
an existing interest at the execution price. Moreover, no market
participant will be able to execute a greater number of contracts than
is associated with the price of its existing interest. As a result, the
small order preference contained in this allocation procedure will not
be a guarantee; the DPM (1) must be quoting at the execution price to
receive an allocation of any size, and (2) cannot execute a greater
number of contracts than the size that is associated with its quote.
If a PMM is not quoting at a price equal to the national
best bid or offer (the ``NBBO'') at the time a preferred order is
received, the allocation procedure for small orders described above
will be applied to the execution of the preferred order (i.e., it will
be executed first by the DPM). If a PMM is quoting at the NBBO at the
time the preferred order is received, the allocation procedure in place
for all other sized orders in the class will be applied to the
execution of the preferred order, except that any Market Turner status
will not apply (e.g., if the default matching algorithm is price-time
with a public customer and participation entitlement overlay, the order
will execute first against any public customer orders, then the PMM
would receive its participation entitlement, then the remaining balance
would be allocated on a price-time basis).
The small order priority overlay will only be applicable
to automatic executions and will not be applicable to any auctions.\25\
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\25\ In addition to AIM, C2 has various electronic auctions that
are described under Rules 6.14, ``Simple Auction Liaison,'' and
6.52, ``Solicitation Auction Mechanism.'' Each of these auctions
generally allocates executions pursuant to the matching algorithm in
effect for the options class with certain exceptions noted in the
respective rules.
---------------------------------------------------------------------------
Lastly, like the existing priority overlays, the small order
priority overlay is optional. The Exchange will announce all
determinations under this Rule by Regulatory Circular.
As described above, the Exchange believes that because DPMs will
have unique obligations to the C2 market,\26\ they should be provided
with certain participation rights. Under the proposed DPM Rules in this
filing, if the DPM is one of the Participants with a quote at the best
price, the participation entitlement will generally equal to 50% when
there is one Market-Maker also quoting at the BBO or 40% when there are
two or more Market-Makers also quoting at the BBO.\27\ This proposed
priority overly [sic] will make available an allocation procedure that
provides that the DPM has precedence to execute orders of five
contracts or fewer. The Exchange believes that this small order
priority overlay will not necessarily result in a significant portion
of the Exchange's volume being executed by the DPM. As stated above,
the DPM would execute against these small orders only if it is quoting
at the best price, and only for the number of contracts associated with
its quotation. Nevertheless, the Exchange will evaluate what percentage
of the volume executed on the Exchange is comprised of orders for five
contracts or fewer executed by DPMs, and will reduce the size of the
orders included in this provision if this percentage is over 40%.
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\26\ See proposed Rule 8.17, ``DPM Obligations.''
\27\ See proposed amendment to Rule 6.12(a) and proposed Rule
8.19, ``Participation Entitlement of DPMs.''
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C2 considered this small order priority overlay as part of its
balancing of DPM obligations and benefits described above and believes
this priority overlay, which includes participation rights for DPMs
only when they are quoting at the best price, helps strike an
appropriate balance of these obligations and benefits.
Other Changes
Rule 1.1--Definitions
The proposed rule change amends Rule 1.1 to define the term ``BBO''
as the best bid or offer disseminated on the Exchange. The Exchange
proposes to include this definition to clarify its meaning in the
Exchange Rules because the term is used throughout the proposed DPM
Rules as well as other Exchange Rules.
Rule 17.50--Minor Rule Violation Plan \28\
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\28\ See CBOE Rule 17.50(g)(14).
---------------------------------------------------------------------------
The proposed rule change also amends Rule 17.50(g)(14) to add DPM
quoting obligations to the Exchange's Minor Rule Violation Plan
(``MRVP'') provision regarding C2 Market-Maker quoting obligations.
This will allow the Exchange to impose sanctions upon DPMs for failing
to meet their quoting obligations pursuant to the MRVP, as it does for
Market-Makers and PMMs. C2 believes these violations are suitable for
inclusion in the MRVP because they are generally technical in nature,
allowing C2 to carry out its regulatory responsibilities more quickly
and efficiently with respect to Market-Maker quoting obligations. For
violations of DPM's quoting obligations, the Exchange may assess fines
ranging from $2,000 to $4,000 for a first offense and $4,000 to $5,000
for a second offense, and may assess a fine of $5,000 or refer to C2's
Business Conduct Committee any subsequent offenses. The Exchange notes
that these fine amounts are the same as the amounts currently imposed
on Market-Makers for violations of their quoting obligations under the
MRVP.
C2 will maintain internal guidelines that dictate the sanctions
that will be imposed for a particular violation (based on the degree of
the violation). As with all other violations in C2's MRVP, C2
[[Page 55264]]
will retain the ability to refer a violation of DPM quoting obligations
to its Business Conduct Committee should the circumstances warrant this
referral.
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.\29\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \30\ requirements that the rules
of an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that adopting a DPM program
will protect investors and the public interest, because it will help
generate greater order flow for the Exchange in appointed classes and
provide additional incentives for DPMs to trade with that order flow,
which in turn adds depth and liquidity to C2's market and ultimately
benefits all market participants. The Exchange believes this deeper
liquidity will make C2 more competitive with other markets that trade
those classes, which will also help remove impediments to and perfect
the mechanism for a free and open market.
Additionally, the Exchange believes that adopting a DPM program
will promote just and equitable principles of trade, as it will require
DPMs to assist in the maintenance of a fair and orderly market, as
reasonably practicable, and maintain net capital consistent with
federal requirements for market-makers. These proposed Rules impose
many obligations on DPMs, including continuous two-sided quoting
obligations, which will ensure that DPMs provide significant liquidity
in their allocated classes to the benefit of all C2 market
participants, and operational capacity requirements, which will ensure
that DPMs are capable of carrying out their obligations, as well as
eligibility requirements and market performance standards. The proposed
Rules also allow the Exchange to impose conditions on DPMs or their
allocations to further ensure that DPMs are providing appropriate depth
and liquidity in their allocated classes.
In light of these obligations, the Exchange also proposed to
provide DPMs with the benefit of a participation entitlement that may
receive higher priority for trades than other Participants, subject to
the requirements set forth in proposed Rule 8.19(b)(1), as well as a
small order priority overlay, subject to the requirements set forth in
proposed Rule 6.12(b)(2). While these trade priorities may reduce the
number of contracts that other Participants may execute in trades in
which the DPM participation entitlement, or small order priority
overlay is applied, the Exchange believes this fact is outweighed by
the benefit of the additional liquidity and more competitive pricing
that DPMs will provide to the market in their appointed classes,
ultimately resulting in a net benefit to Exchange customers. These
trade priorities are part of the balancing of C2's overall market
structure, which is designed to encourage vigorous price competition
between Market-Makers on the Exchange, as well as maximize the benefits
of price competition resulting from the entry of customer and non-
customer orders, while encouraging Participants to provide market
depth. Therefore, the Exchange believes the obligations proposed to be
imposed on DPMs are offset by the benefits proposed to be conferred
upon DPMs.
In addition, the Exchange believes that the approval and allocation
procedures and policies will ensure that Participants are approved to
act as DPMs and securities traded on the Exchange are allocated in an
equitable manner, and that all DPMs will have a fair opportunity for
approvals and allocations based on established criteria and procedures.
The proposed rules that give the Exchange the authority to terminate,
limit, or condition DPM approvals or reallocate securities will allow
the Exchange to ensure that its market maintains an uninterrupted high
level of liquidity for customers in allocated classes, even when
unusual or changing market circumstances exist. Further, the Exchange
believes that the advanced notice provisions and appeal procedures that
the proposed rules put in place for all determinations made by the
Exchange with respect to DPM approvals and allocations, including
termination and reallocation decisions, are reasonable procedures that
will create a fair and equitable decision-making process with respect
to DPMs.
The Exchange believes the proposed rule change to add violations of
DPM quoting obligation to C2's MRVP will strengthen C2's ability to
carry out its regulatory responsibilities as a self-regulatory
organization pursuant to the Act and reinforce its surveillance and
enforcement functions.
The Exchange believes that adding the definition of BBO to the
Rules protects investors and the public interest, as it clarifies the
meaning of this term, which is used throughout the proposed DPM Rules
and other Exchange Rules, for investors.
Finally, the Exchange believes that the proposed rule change is
consistent with the requirements of the Act because, as the Exchange
notes above, the proposed requirements for DPMs are based primarily on
existing requirements for DPMs on another exchange (CBOE).
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.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File No. SR-C2-2012-024 on the subject line.
[[Page 55265]]
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-C2-2012-024. 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 Web site (https://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 such filing also will be available for inspection
and copying at the principal office of C2. 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 No. SR-C2-2012-024 and should be submitted on or
before September 28, 2012.
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\31\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22059 Filed 9-6-12; 8:45 am]
BILLING CODE 8011-01-P
