Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to the Regulation NMS Plan To Address Extraordinary Market Volatility, 16320-16324 [2013-05885]

Download as PDF 16320 Federal Register / Vol. 78, No. 50 / Thursday, March 14, 2013 / Notices the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 70 and Rule 19b–4(f)(6) thereunder.71 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 72 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6) 73 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay and allow the proposed rule change to be operative as of March 22, 2013, noting that doing so would allow the Exchange to quickly offer Exchange participants the proposed CHX Only order type and price sliding functionality while ensuring that the Exchange’s matching system has been properly tested to ensure a smooth transition to the modified CHX Only order type and Post Only order modifier. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest.74 This waiver will allow the Exchange to modify this order type without delay such that is similar to an order type offered by other another exchange.75 Therefore, the Commission hereby waives the 30-day operative delay and designates the proposal operative as of March 22, 2013. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and 70 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 72 17 CFR 240.19b–4(f)(6). 73 17 CFR 240.19b–4(f)(6). 74 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 75 The CHX-Only order, as modified, is based upon BATS Y-Exchange Rule 11.9(g)(1)(C). See also Exchange Act Release No. 67657 (August 14, 2012), 77 FR 50199 (August 20, 2012) (SR–BATS–2010– 035). The differences between the proposed rule and the BATS rule are discussed in the Exchange’s proposed rule change. tkelley on DSK3SPTVN1PROD with NOTICES 71 17 VerDate Mar<15>2010 16:51 Mar 13, 2013 Jkt 229001 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: [FR Doc. 2013–05878 Filed 3–13–13; 8:45 am] Electronic Comments BILLING CODE 8011–01–P • 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 Number SR–CHX–2013–07 on the subject line. 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 Number SR–CHX–2013–07. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (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 the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CHX–2013–07 and should be submitted on or before April 4, 2013. PO 00000 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.76 Kevin M. O’Neill, Deputy Secretary. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69083; File No. SR–C2– 2013–013] Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to the Regulation NMS Plan To Address Extraordinary Market Volatility March 8, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 7, 2013, C2 Options Exchange, Incorporated (‘‘C2’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘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 modify its rules to address certain option order handling procedures and quoting obligations on the Exchange after the implementation of the market wide equity Plan to Address Extraordinary Market Volatility (the ‘‘Plan’’). 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, 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 76 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 Frm 00078 Fmt 4703 Sfmt 4703 E:\FR\FM\14MRN1.SGM 14MRN1 Federal Register / Vol. 78, No. 50 / Thursday, March 14, 2013 / Notices 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 tkelley on DSK3SPTVN1PROD with NOTICES 1. Purpose The Exchange is proposing to update Exchange rules to correspond with the Plan. Specifically, the Exchange is proposing to make proposed changes to Exchange Rules Rule 6.10, ‘‘Order Types Defined,’’ 6.11, ‘‘Openings (and sometimes Closings),’’ Rule 6.13, ‘‘Complex Order Execution,’’ Rule 6.15, ‘‘Obvious Error and Catastrophic Errors,’’ Rule 6.18, ‘‘HAL,’’ Rule 6.39, ‘‘Equity Market Plan to Address Extraordinary Market Volatility,’’ Rule 8.5, ‘‘Obligations of Market-Makers, Rule 8.17, ‘‘DPM Obligations,’’ and Rule 8.19, ‘‘DPM Participation Entitlements.’’ The Exchange believes these modifications will protect investors because when an underlying security is in a limit or straddle state (collectively referred to in this filing as a ‘‘limit uplimit down state’’), there will not be a reliable price for the security to serve as a benchmark for the price of the option. In addition, the width of the markets might be compromised and, thus, the quality of execution for retail customers. The Plan is more fully explained below. In an attempt to address extraordinary market volatility in NMS Stock, and, in particular, events like the severe volatility on May 6, 2010, the Exchange, in conjunction with the other national securities exchanges and the Financial Industry Regulatory Authority, Inc. (collectively, ‘‘Participants’’) drafted the Plan pursuant to Rule 608 of Regulation NMS and under the Securities Exchange Act of 1934 (the ‘‘Act’’).3 The Plan is primarily designed to, among other things, address extraordinary market volatility in NMS stocks, protect investors, and promote fair and orderly markets. The Plan provides for marketwide limit up-limit down requirements that prevent trades in individual NMS Stocks from occurring outside of specified price bands, as defined in Section I(N) of the Plan. These requirements would be coupled with trading pauses, as defined in Section I(Y) of the Plan, to accommodate more fundamental price moves (as opposed to 3 See Securities Exchange Act Release No. 64547 (May 25, 2011), 76 FR 31647 (June 1, 2011) (File No. 4–631). VerDate Mar<15>2010 16:51 Mar 13, 2013 Jkt 229001 erroneous trades or monetary gaps of liquidity). The Plan was filed on April 5, 2011 by the Participants for publication and comment.4 The Participants requested the Commission approve the Plan as a one-year pilot. On May 24, 2012, the Participants filed an amendment to the Plan which clarified, among other things, the calculation of the reference price, as defined in Section I(T) of the Plan, potential for order type exemption, and the creation of an Advisory Committee.5 On May 31, 2012, the Commission approved the Plan, as amended, on a one-year pilot basis.6 Under the Plan, Participants are required to adopt certain rules in order to comply. Specifically, Section VI of the Plan sets forth the limit up-limit down requirements of the Plan, and in particular, that all trading centers in NMS Stocks, including both those operated by the Participants and those operated by member of Participants, shall establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trades at prices that are below the lower price band or above the upper price band for an NMS Stock, consistent with the Plan. Price Bands will be calculated by Securities Information Processors (‘‘SIPs’’) responsible for consolidation of information for an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the Act. As proposed, and approved, the Plan would be implemented, as a one year pilot program, in two phases.7 Phase I would become effective on April 8 and apply to Tier I NMS Stock per Appendix A of the Plan, and Phase II would become effective six months later, or earlier if announced by the SIPs 30 days prior, and would apply to all NMS Stocks. Under the Plan, when one side of the market for an individual security is outside the applicable price band, the SIPs will be required to disseminate such National Best Bid or National Best Offer with an appropriate flag identifying it as non-executable. When the other side of the market reaches the applicable Price Band, the market for an individual security will enter a limit state. Trading for that security will exit the limit state if, within 15 seconds of entering the limit state, all limit state quotations were executed or cancelled. If the market does not exit a limit state within 15 seconds, then the primary 4 Id. 5 See Securities and Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4–631). 6 See Securities and Exchange Act Release No. 67091 (May 31, 2012) 77 FR 33498 (June 6, 2012). 7 Id. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 16321 listing exchange will declare a fiveminute trading pause, which will be applicable to all markets trading the security. Though the Plan is primarily designed for equity markets, the Exchange believes it will, indirectly, potentially impact the options markets as well. Thus, as stated above, the Exchange is proposing to amend its rules to ensure the option markets are not harmed as a result of the Plan’s implementation. As such, the Exchange is proposing to amend various rules to reflect such changes. The Exchange believes such changes will protect participants, the Exchange and investors in general. First, the Exchange is proposing to add Rule 6.39 to codify the changes throughout the Exchange’s rules. The Exchange is proposing to add the title to ‘‘Equity Market Plan to Address Extraordinary Market Volatility’’ and add text. Rule 6.39 will define the Plan as it applies to the Exchange. In addition, the proposed rule change will describe the location of the other rule changes associated with the Plan. In essence, the proposed changes to Rule 6.39 will serve as a roadmap for the Exchange’s universal changes due to the implementation of the Plan. The proposed rule changes will list changes to Exchange order types, order handling, obvious error, and market-maker quoting obligations that the Exchange is proposing to make in connection with the implementation of the Plan. These rule changes are more thoroughly described in various sections of the Exchange Rulebook, but having one place referencing all rules associated with the Plan will serve to better protect investors by making the other rules easily located. The Exchange believes the proposed changes to Rule 6.39 will describe to Trading Permit Holders (‘‘TPHs’’), and other participants, where to find the changes associated with the Plan and will, thus, attempt to maintain a more orderly market. Next, the Exchange is proposing to modify its opening procedures under Rule 6.11, ‘‘Openings (and sometimes Closings).’’ The Exchange is proposing to add an Interpretation and Policy .03 to clarify that if the underlying security for a class of options enters into a limit up-limit down state when the class moves to opening rotation, any market orders entered that trading day currently opening, prior to the opening of that class, will be cancelled. The Exchange believes this change is consistent with cancelling market orders in general during a limit up-limit down period as described in more detail below. The Exchange further believes this proposed change will help the Exchange to E:\FR\FM\14MRN1.SGM 14MRN1 16322 Federal Register / Vol. 78, No. 50 / Thursday, March 14, 2013 / Notices protect its TPHs from executing skewed orders during limit up-limit down periods. Next, the Exchange is proposing to modify Exchange Rule 6.18, ‘‘HAL.’’ Exchange Rule 6.18 currently governs the operation of HAL, a feature within the System that provides automated order handling in designated classes trading on the System for qualifying orders that are not automatically executed by the System. The Exchange determines the eligible order size, eligible order types, eligible origin code (i.e. public customer orders, nonMarket-Maker broker-dealer orders and Market-Maker broker-dealer orders), and classes in which HAL is activated.8 When the Exchange receives a qualifying order that is marketable against the National Best Bid or Offer (‘‘NBBO’’) and/or the Exchange’s best bid or offer (‘‘BBO’’),9 HAL electronically exposes the order 10 at the NBBO price to allow Market-Makers appointed in that class, as well as all TPHs acting as agent for orders, at the top of the Exchange’s book in the relevant series (or all TPHs if allowed by the Exchange) 11 to step-up to the NBBO price. Because the underlying security of the option in HAL affects the pricing of the eventually executed order, the Exchange is proposing to make changes to Rule 6.18 to reflect the implementation of the Plan. More specifically, the Exchange is proposing to amend Rule 6.18 to modify the behavior of HAL of a market order while the underlying security of the option is in a limit up-limit down state. If an underlying security shall enter a limit state while a HAL of a market order is in process, the auction will end early, upon the entering of the state, and any unexecuted portion of a market order shall be cancelled. The Exchange believes the proposed rule changes will best protect the TPH by ensuring it does not receive an executed order with an unanticipated price due to the change in the underlying security. In addition, by ending the auction early, the Exchange is providing a better chance for the TPH to get its order executed as it is in the TPH’s interest for an earlier execution versus a later one. 8 Rule 6.18. will not electronically expose the order if the Exchange’s quotation contains resting orders and does not contain sufficient Market-Maker quotation interest to satisfy the entire order. 10 The duration of the exposure period may not exceed one second. Rule 6.18(c) describes the manner in which an exposed order is allocated under HAL, and Rule 6.18(d) lists the circumstances in which an exposure period would terminate early. tkelley on DSK3SPTVN1PROD with NOTICES 9 HAL 11 VerDate Mar<15>2010 16:51 Mar 13, 2013 Jkt 229001 Next, the Exchange is proposing to modify how an electronic complex order request for responses (‘‘RFR’’) auction (‘‘COA’’) will operate while the underlying security of at least one of the options has entered a limit state. Exchange Rule 6.13(c) currently describes the general COA process. Generally, on a class-by-class basis, the Exchange may activate COA, which is a process by which eligible complex orders 12 are given an opportunity for price improvement before being booked in the electronic complex order book (‘‘COB’’) or once on a PAR workstation. On receipt of a COA-eligible order and request from a TPH representing the order that it be COA’d, the Exchange will send an RFR message to all TPHs who have elected to receive RFR messages.13 Each Market-Maker with an appointment in the relevant option class and each TPH acting as agent for orders resting at the top of the COB in the relevant options series may then submit responses to the RFR message during the Response Time Interval.14 The Exchange is proposing to add to the COA rule that if, during COA, the underlying security of a market order enters a limit up-limit down state, the COA will end upon the entering of that state and the remaining portion of the order will cancel. Next, the Exchange is proposing to amend Exchange Rule 6.15 relating to the nullification and adjustment of options transactions. Under the current rule, an Obvious Pricing Error occurs when the execution price of an electronic transaction is above or below the Theoretical Price for the series by a specified amount. For purpose of the rule, the ‘‘Theoretical Price’’ of an option series is currently defined, for series traded on at least one other options exchange, as the last national 12 An eligible complex order, referred to in Rule 6.13 as a ‘‘COA-eligible order,’’ means a complex order that, as determined by the Exchange on a class-by-class basis, is eligible for a COA considering the order’s marketability (defined as a number of ticks away from the current market), size, complex order type and complex order origin type (i.e. non-broker-dealer public customer, brokerdealers that are not Market-Makers or specialists on an options exchange, and/or Market-Makers or specialists on an options exchange). All determinations by the Exchange on COA-eligible order parameters are announced to Trading Permit Holders by Regulatory Circular. See Rule 6.18(c)(1)(B) and Interpretation and Policy .01 to Rule 6.18. 13 See Rule 6.18(c)(3)(B). The RFR message will identify the component series, the size of the COAeligible order and any contingencies, but will not identify the side of the market. 14 See Rule 6.18(c)(3). A ‘‘Response Time Interval’’ means the period of time during which responses to the RFR may be entered, the length of which is determined by the Exchange on a classby-class basis but may not exceed three seconds. See Rule 6.18(c)(3)(B). PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 best bid price with respect to an erroneous sell transaction and the last national best offer price with respect to an erroneous buy transaction, just prior to the trade. If there are no quotes for comparison, designated help desk personnel 15 will determine the Theoretical Price. Because the theoretical price may be unreliable due to the underlying security entering a limit state, the Exchange is proposing to amend the Exchange obvious error rules to provide that the Exchange may not nullify or adjust trades when the underlying security is in a limit up-limit down state. The Exchange is also proposing to add language specifying that transactions in options that overlay a security that is in a limit state may, however, be reviewed on an Exchange motion. The Exchange is also proposing to add language to specify that this provision will be on a one year pilot basis to coincide with the Plan. The Exchange will provide the Commission with data and analysis during the duration of this pilot as requested.16 The Exchange believes this will best protect the market because it allows limit orders to be executed on the Exchange while the underlying securities are in limit states regardless of the calculated theoretical price. In addition, the Exchange believes the proposed rule change would protect against TPHs getting a potential second look at transactions that happened during limit states that could be unfair to other participants. The proposed rule change would encourage added liquidity on the Exchange as the proposed changes would help to ensure that limit orders that are filled during a limit up-limit down state would have certainty of execution. By allowing the Exchange to continue to review such transactions on their own motion, the Exchange is further attempting to protect investors and maintain an orderly market. The Exchange believes that the combination of encouraging TPHs to participate on the market and allowing a safeguard to erroneous trades will provide the best solution during the pilot of the Plan. Next, the Exchange is proposing to modify Rule 6.10 and 6.13 and, more specifically, how certain Exchange order types will be handled while the underlying security of such orders enters into a limit up-limit down state. The proposed rule change will, among 15 See Exchange Rule 6.15(a)(3)(B). as an administrative change, the Exchange is proposing to eliminate a sentence referring to an Interpretation and Policy (.08) that no longer exists. The proposed provision will be the new Interpretation and Policy (.08) to Rule 6.15. 16 Finally, E:\FR\FM\14MRN1.SGM 14MRN1 Federal Register / Vol. 78, No. 50 / Thursday, March 14, 2013 / Notices tkelley on DSK3SPTVN1PROD with NOTICES other things, address how market orders,17 market-on-close,18 stop orders,19 and stock option orders 20 will function on the Exchange upon the implementation of the Plan. More specifically, the Exchange is proposing to add language to clarify that: (a) Market orders will be returned during limit up-limit down states, (b) marketon-close orders will not be elected if the underlying security is in a limit up-limit down state, (c) stop orders will be held while the underlying security is in a limit up-limit down state, and (d) stockoption orders will only execute if the calculated stock price is within the permissible Price Bands.21 In addition, during a limit up-limit down state, if a message is sent to replace a limit order with a market order, the resting limit order will be cancelled and the replaced market order will also be cancelled. When a stock is in a limit or straddle state, while options trading will continue, there will not be a reliable price for a security to serve as a benchmark for the price of the option. In addition, without a reliable underlying stock price, there is an enhanced risk of errors and improper executions. With these concerns in mind, the Exchange believes that adding a level of certainty for TPHs will encourage participation on the Exchange whilst the underlying securities are in limit up-limit down states. Thus, the Exchange believes handling these certain orders in this way will best protect the investor after the implementation of the Plan by not allowing execution at unreasonable prices due to the shift in the stock prices. Finally, the Exchange is proposing to eliminate all market maker obligations for options in which the underlying security is in a limit state while the underlying security in is in the limit uplimit down state. Currently, Exchange 17 See Exchange Rule 6.10 which defines a market order as ‘‘an order to buy or sell a stated number of options contracts at the best price available at the time of execution.’’ 18 See Exchange Rule 6.10(c)(2) which defines a market-on-close order designation as an order ‘‘to be executed as close as possible to the closing bell, or during the closing rotation, and should be near to or at the closing price for the particular series of option contracts. 19 See Exchange Rule 6.10(c)(3) which defines a stop order contingency to an order as one that ‘‘to buy or sell when the market for a particular option contract reaches a specified price on the Exchange.’’ 20 See Exchange Rule 6.13(a)(2) which defines a stock-option order as ‘‘an order to buy or sell a stated number of units of an underlying stock or a security convertible into the underlying stock * * * coupled with the purchase or sale of options contract(s) on the opposite side of the market.’’ 21 If the calculated price of a stock-option order is not within the permissible Price Bands, the stockoption order will be routed for manual handling. VerDate Mar<15>2010 16:51 Mar 13, 2013 Jkt 229001 Rules 8.5 and 8.17 impose certain obligations on Market-Makers and DPMs, respectively, including obligations to provide continuous quotes as follows: 22 • Rule 8.5 requires that MarketMakers provide a continuous two-sided market in 60% of the non-adjusted option series of the Market-Maker’s appointed class that have a time to expiration of less than nine months; • Rule 8.17(a)(1) requires DPMs to provide continuous quotes in at least the lesser of 99% or 100% minus one call-put pair 23 of the non-adjusted option series of each class allocated to it. Exchange Rule 8.19 provides that DPMs generally will receive the participation entitlements in their assigned classes when quoting at the best price if they satisfy their obligations and other conditions set forth in the rules. Specifically, Rule 8.19 provides that the DPM participation entitlement will be 50% when there is one MarketMaker also quoting at the best price on the Exchange and 40% when there are two Market-Makers also quoting at the best price on the Exchange.24 Because prices may be skewed due to the underlying security being in a limit up-limit down state, the Exchange is proposing to eliminate all Market-Maker quoting obligations in series of options that the underlying security is currently in a limit up-limit down state. Because of the direct relationship between an options price and the price of the associated underlying security, the Exchange believes eliminating all Market-Maker obligations in connection with the implementation of the Plan is the most effective way to ensure the options markets will not be compromised. Because a bid or offer of an underlying security may not be executable due to a limit or straddle state, the ability to hedge the purchase or sale of an option may not be possible or, in the least, is at risk. Because of this reason, the Exchange is anticipating that 22 For purposes of Rules 8.5(a)(1), and 8.17(a)(1), ‘‘continuous’’ means 90% of the time. If a technical failure of limitation of the System prevents a Market-Maker from maintaining timely and accurate quotes in a series, the duration of such failure will not be included in the 90% determination. 23 See Rule 8.17(a)(1) which defines a ‘‘call-up pair’’ as ‘‘one call and one put that cover the same underlying instrument and have the same expiration date and exercise price.’’ 24 The participation entitlements of DPMs are based on the number of contracts remaining after all public customer orders in the book at the best price on the Exchange have been satisfied. Additionally, a DPM may not be allocated a total quantity greater than the quantity for which the DPM is quoting at the best price. See Rules 8.19(b)(1)(B) and (C). PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 16323 Exchange Market-Makers will be forced to change behaviors. In addition, the Exchange believes other options markets will be implementing similar changes. In an effort to protect the investors in the options market while the underlying security is in a limit up-limit down state, the Exchange believes that eliminating quoting obligations is the more effective way for this protection. The Exchange, however, is proposing that Market-Makers may still receive participation entitlements pursuant to the proposed rules in all series in their assigned classes in which they are quoting, even in series in which they are not required to provide continuous electronic quotes under the Exchange Rules. Market-Makers already receive participation entitlements in series they are not required to quote. For example, a DPM is currently required to provide continuous quotes in at least 99% of the non-adjusted option series or 100% of the non-adjusted series minus one callput pair of each option class allocated to it for 90% of the trading day.25 If the DPM elects to quote in 100% of the nonadjusted series in an option class allocated to it, it will receive a participation entitlement in all of those series when quoting at the best price, including the 1% of the series in which it is not required to quote in. Thus, under the proposed rule change, the market would continue to function as it does now. The Exchange believes this benefit is appropriate, as it incentivizes Market-Makers to quote in as many series as possible in their appointed classes, even those series in which the Rules do not require them to continuously quote. Thus, under the proposed rule change, the market would continue to function as it does now with respect to how entitlements are allocated to Market-Makers. The Exchange believes this benefit is appropriate, as it incentivizes MarketMakers to quote in as many series as possible in their appointed classes, even those series in which the underlying security has entered into a limit up-limit down state. The Exchange is attempting to better encourage Market-Makers to quote though they will not be obligated to. If they do choose to quote, the Exchange believes they should be entitled to receive the Entitlement for such quoting as appropriate. The Exchange believes the combination of these modifications will protect investors because when an underlying security is in a limit or straddle state, there will not be a reliable price for the security to serve as a benchmark for the price of the option. 25 See E:\FR\FM\14MRN1.SGM Rule 8.17(a). 14MRN1 16324 Federal Register / Vol. 78, No. 50 / Thursday, March 14, 2013 / Notices In addition, the width of the markets might be compromised and, thus, the quality of execution for retail customers. At the same time, the Exchange believes the proposed rule change will create more certainty on the options markets encouraging more investors to participate despite the changes associated with the Plan. tkelley on DSK3SPTVN1PROD with NOTICES 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the ‘‘Act’’) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.26 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 27 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitation transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 28 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes the proposed changes will be in accordance with the Act as they are merely intended to ensure the options markets will continue to remain just and equitable with the implementation of the Plan which is intended to reduce the negative impacts of a sudden, unanticipated price movement in NMS stocks. The proposed rule changes would promote this intention in the options markets while protecting investors participating there. In addition, similar rule changes will be adopted by other markets in the national market system in a coordinated manner promoting the public interest. Creating a more orderly market will promote just and equitable principles of trade by allowing investors to feel more secure in their participation in the national market system after the implementation of the Plan. 26 15 27 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 28 Id. VerDate Mar<15>2010 16:51 Mar 13, 2013 Jkt 229001 B. Self-Regulatory Organization’s Statement on Burden on Competition C2 does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange believes the proposed changes will not impose any burden on intramarket competition because it applies to all TPHs equally. The Exchange does not believe the proposed changes will impose any burden on intermarket competition as the changes are merely being made to protect investors with the implementation of the Plan. In addition, the propose changes will provide certainty of treatment and execution of options orders during periods of extraordinary market volatility. 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 (i) as the Commission may designate up to 90 days of such date 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 such 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: 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–C2–2013–013. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (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 the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–C2–2013– 013 and should be submitted on or before March 29, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–05885 Filed 3–13–13; 8:45 am] BILLING CODE 8011–01–P 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–C2–2013–013 on the subject line. PO 00000 Frm 00082 Fmt 4703 Sfmt 9990 29 17 E:\FR\FM\14MRN1.SGM CFR 200.30–3(a)(12). 14MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 50 (Thursday, March 14, 2013)]
[Notices]
[Pages 16320-16324]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05885]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69083; File No. SR-C2-2013-013]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing of Proposed Rule Change Relating to the Regulation NMS
Plan To Address Extraordinary Market Volatility

March 8, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 7, 2013, C2 Options Exchange, Incorporated (``C2'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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 modify its rules to address certain option
order handling procedures and quoting obligations on the Exchange after
the implementation of the market wide equity Plan to Address
Extraordinary Market Volatility (the ``Plan'').
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, 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

[[Page 16321]]

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 Exchange is proposing to update Exchange rules to correspond
with the Plan. Specifically, the Exchange is proposing to make proposed
changes to Exchange Rules Rule 6.10, ``Order Types Defined,'' 6.11,
``Openings (and sometimes Closings),'' Rule 6.13, ``Complex Order
Execution,'' Rule 6.15, ``Obvious Error and Catastrophic Errors,'' Rule
6.18, ``HAL,'' Rule 6.39, ``Equity Market Plan to Address Extraordinary
Market Volatility,'' Rule 8.5, ``Obligations of Market-Makers, Rule
8.17, ``DPM Obligations,'' and Rule 8.19, ``DPM Participation
Entitlements.'' The Exchange believes these modifications will protect
investors because when an underlying security is in a limit or straddle
state (collectively referred to in this filing as a ``limit up-limit
down state''), there will not be a reliable price for the security to
serve as a benchmark for the price of the option. In addition, the
width of the markets might be compromised and, thus, the quality of
execution for retail customers. The Plan is more fully explained below.
In an attempt to address extraordinary market volatility in NMS
Stock, and, in particular, events like the severe volatility on May 6,
2010, the Exchange, in conjunction with the other national securities
exchanges and the Financial Industry Regulatory Authority, Inc.
(collectively, ``Participants'') drafted the Plan pursuant to Rule 608
of Regulation NMS and under the Securities Exchange Act of 1934 (the
``Act'').\3\ The Plan is primarily designed to, among other things,
address extraordinary market volatility in NMS stocks, protect
investors, and promote fair and orderly markets. The Plan provides for
market-wide limit up-limit down requirements that prevent trades in
individual NMS Stocks from occurring outside of specified price bands,
as defined in Section I(N) of the Plan. These requirements would be
coupled with trading pauses, as defined in Section I(Y) of the Plan, to
accommodate more fundamental price moves (as opposed to erroneous
trades or monetary gaps of liquidity).
---------------------------------------------------------------------------

\3\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
---------------------------------------------------------------------------

The Plan was filed on April 5, 2011 by the Participants for
publication and comment.\4\ The Participants requested the Commission
approve the Plan as a one-year pilot. On May 24, 2012, the Participants
filed an amendment to the Plan which clarified, among other things, the
calculation of the reference price, as defined in Section I(T) of the
Plan, potential for order type exemption, and the creation of an
Advisory Committee.\5\ On May 31, 2012, the Commission approved the
Plan, as amended, on a one-year pilot basis.\6\
---------------------------------------------------------------------------

\4\ Id.
\5\ See Securities and Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
\6\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
---------------------------------------------------------------------------

Under the Plan, Participants are required to adopt certain rules in
order to comply. Specifically, Section VI of the Plan sets forth the
limit up-limit down requirements of the Plan, and in particular, that
all trading centers in NMS Stocks, including both those operated by the
Participants and those operated by member of Participants, shall
establish, maintain, and enforce written policies and procedures that
are reasonably designed to prevent trades at prices that are below the
lower price band or above the upper price band for an NMS Stock,
consistent with the Plan. Price Bands will be calculated by Securities
Information Processors (``SIPs'') responsible for consolidation of
information for an NMS Stock pursuant to Rule 603(b) of Regulation NMS
under the Act. As proposed, and approved, the Plan would be
implemented, as a one year pilot program, in two phases.\7\ Phase I
would become effective on April 8 and apply to Tier I NMS Stock per
Appendix A of the Plan, and Phase II would become effective six months
later, or earlier if announced by the SIPs 30 days prior, and would
apply to all NMS Stocks.
---------------------------------------------------------------------------

\7\ Id.
---------------------------------------------------------------------------

Under the Plan, when one side of the market for an individual
security is outside the applicable price band, the SIPs will be
required to disseminate such National Best Bid or National Best Offer
with an appropriate flag identifying it as non-executable. When the
other side of the market reaches the applicable Price Band, the market
for an individual security will enter a limit state. Trading for that
security will exit the limit state if, within 15 seconds of entering
the limit state, all limit state quotations were executed or cancelled.
If the market does not exit a limit state within 15 seconds, then the
primary listing exchange will declare a five-minute trading pause,
which will be applicable to all markets trading the security.
Though the Plan is primarily designed for equity markets, the
Exchange believes it will, indirectly, potentially impact the options
markets as well. Thus, as stated above, the Exchange is proposing to
amend its rules to ensure the option markets are not harmed as a result
of the Plan's implementation. As such, the Exchange is proposing to
amend various rules to reflect such changes. The Exchange believes such
changes will protect participants, the Exchange and investors in
general.
First, the Exchange is proposing to add Rule 6.39 to codify the
changes throughout the Exchange's rules. The Exchange is proposing to
add the title to ``Equity Market Plan to Address Extraordinary Market
Volatility'' and add text. Rule 6.39 will define the Plan as it applies
to the Exchange. In addition, the proposed rule change will describe
the location of the other rule changes associated with the Plan. In
essence, the proposed changes to Rule 6.39 will serve as a roadmap for
the Exchange's universal changes due to the implementation of the Plan.
The proposed rule changes will list changes to Exchange order types,
order handling, obvious error, and market-maker quoting obligations
that the Exchange is proposing to make in connection with the
implementation of the Plan. These rule changes are more thoroughly
described in various sections of the Exchange Rulebook, but having one
place referencing all rules associated with the Plan will serve to
better protect investors by making the other rules easily located. The
Exchange believes the proposed changes to Rule 6.39 will describe to
Trading Permit Holders (``TPHs''), and other participants, where to
find the changes associated with the Plan and will, thus, attempt to
maintain a more orderly market.
Next, the Exchange is proposing to modify its opening procedures
under Rule 6.11, ``Openings (and sometimes Closings).'' The Exchange is
proposing to add an Interpretation and Policy .03 to clarify that if
the underlying security for a class of options enters into a limit up-
limit down state when the class moves to opening rotation, any market
orders entered that trading day currently opening, prior to the opening
of that class, will be cancelled. The Exchange believes this change is
consistent with cancelling market orders in general during a limit up-
limit down period as described in more detail below. The Exchange
further believes this proposed change will help the Exchange to

[[Page 16322]]

protect its TPHs from executing skewed orders during limit up-limit
down periods.
Next, the Exchange is proposing to modify Exchange Rule 6.18,
``HAL.'' Exchange Rule 6.18 currently governs the operation of HAL, a
feature within the System that provides automated order handling in
designated classes trading on the System for qualifying orders that are
not automatically executed by the System. The Exchange determines the
eligible order size, eligible order types, eligible origin code (i.e.
public customer orders, non-Market-Maker broker-dealer orders and
Market-Maker broker-dealer orders), and classes in which HAL is
activated.\8\ When the Exchange receives a qualifying order that is
marketable against the National Best Bid or Offer (``NBBO'') and/or the
Exchange's best bid or offer (``BBO''),\9\ HAL electronically exposes
the order \10\ at the NBBO price to allow Market-Makers appointed in
that class, as well as all TPHs acting as agent for orders, at the top
of the Exchange's book in the relevant series (or all TPHs if allowed
by the Exchange) \11\ to step-up to the NBBO price.
---------------------------------------------------------------------------

\8\ Rule 6.18.
\9\ HAL will not electronically expose the order if the
Exchange's quotation contains resting orders and does not contain
sufficient Market-Maker quotation interest to satisfy the entire
order.
\10\ The duration of the exposure period may not exceed one
second. Rule 6.18(c) describes the manner in which an exposed order
is allocated under HAL, and Rule 6.18(d) lists the circumstances in
which an exposure period would terminate early.
\11\
---------------------------------------------------------------------------

Because the underlying security of the option in HAL affects the
pricing of the eventually executed order, the Exchange is proposing to
make changes to Rule 6.18 to reflect the implementation of the Plan.
More specifically, the Exchange is proposing to amend Rule 6.18 to
modify the behavior of HAL of a market order while the underlying
security of the option is in a limit up-limit down state. If an
underlying security shall enter a limit state while a HAL of a market
order is in process, the auction will end early, upon the entering of
the state, and any unexecuted portion of a market order shall be
cancelled. The Exchange believes the proposed rule changes will best
protect the TPH by ensuring it does not receive an executed order with
an unanticipated price due to the change in the underlying security. In
addition, by ending the auction early, the Exchange is providing a
better chance for the TPH to get its order executed as it is in the
TPH's interest for an earlier execution versus a later one.
Next, the Exchange is proposing to modify how an electronic complex
order request for responses (``RFR'') auction (``COA'') will operate
while the underlying security of at least one of the options has
entered a limit state. Exchange Rule 6.13(c) currently describes the
general COA process. Generally, on a class-by-class basis, the Exchange
may activate COA, which is a process by which eligible complex orders
\12\ are given an opportunity for price improvement before being booked
in the electronic complex order book (``COB'') or once on a PAR
workstation. On receipt of a COA-eligible order and request from a TPH
representing the order that it be COA'd, the Exchange will send an RFR
message to all TPHs who have elected to receive RFR messages.\13\ Each
Market-Maker with an appointment in the relevant option class and each
TPH acting as agent for orders resting at the top of the COB in the
relevant options series may then submit responses to the RFR message
during the Response Time Interval.\14\ The Exchange is proposing to add
to the COA rule that if, during COA, the underlying security of a
market order enters a limit up-limit down state, the COA will end upon
the entering of that state and the remaining portion of the order will
cancel.
---------------------------------------------------------------------------

\12\ An eligible complex order, referred to in Rule 6.13 as a
``COA-eligible order,'' means a complex order that, as determined by
the Exchange on a class-by-class basis, is eligible for a COA
considering the order's marketability (defined as a number of ticks
away from the current market), size, complex order type and complex
order origin type (i.e. non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options
exchange, and/or Market-Makers or specialists on an options
exchange). All determinations by the Exchange on COA-eligible order
parameters are announced to Trading Permit Holders by Regulatory
Circular. See Rule 6.18(c)(1)(B) and Interpretation and Policy .01
to Rule 6.18.
\13\ See Rule 6.18(c)(3)(B). The RFR message will identify the
component series, the size of the COA-eligible order and any
contingencies, but will not identify the side of the market.
\14\ See Rule 6.18(c)(3). A ``Response Time Interval'' means the
period of time during which responses to the RFR may be entered, the
length of which is determined by the Exchange on a class-by-class
basis but may not exceed three seconds. See Rule 6.18(c)(3)(B).
---------------------------------------------------------------------------

Next, the Exchange is proposing to amend Exchange Rule 6.15
relating to the nullification and adjustment of options transactions.
Under the current rule, an Obvious Pricing Error occurs when the
execution price of an electronic transaction is above or below the
Theoretical Price for the series by a specified amount. For purpose of
the rule, the ``Theoretical Price'' of an option series is currently
defined, for series traded on at least one other options exchange, as
the last national best bid price with respect to an erroneous sell
transaction and the last national best offer price with respect to an
erroneous buy transaction, just prior to the trade. If there are no
quotes for comparison, designated help desk personnel \15\ will
determine the Theoretical Price.
---------------------------------------------------------------------------

\15\ See Exchange Rule 6.15(a)(3)(B).
---------------------------------------------------------------------------

Because the theoretical price may be unreliable due to the
underlying security entering a limit state, the Exchange is proposing
to amend the Exchange obvious error rules to provide that the Exchange
may not nullify or adjust trades when the underlying security is in a
limit up-limit down state. The Exchange is also proposing to add
language specifying that transactions in options that overlay a
security that is in a limit state may, however, be reviewed on an
Exchange motion. The Exchange is also proposing to add language to
specify that this provision will be on a one year pilot basis to
coincide with the Plan. The Exchange will provide the Commission with
data and analysis during the duration of this pilot as requested.\16\
The Exchange believes this will best protect the market because it
allows limit orders to be executed on the Exchange while the underlying
securities are in limit states regardless of the calculated theoretical
price.
---------------------------------------------------------------------------

\16\ Finally, as an administrative change, the Exchange is
proposing to eliminate a sentence referring to an Interpretation and
Policy (.08) that no longer exists. The proposed provision will be
the new Interpretation and Policy (.08) to Rule 6.15.
---------------------------------------------------------------------------

In addition, the Exchange believes the proposed rule change would
protect against TPHs getting a potential second look at transactions
that happened during limit states that could be unfair to other
participants. The proposed rule change would encourage added liquidity
on the Exchange as the proposed changes would help to ensure that limit
orders that are filled during a limit up-limit down state would have
certainty of execution. By allowing the Exchange to continue to review
such transactions on their own motion, the Exchange is further
attempting to protect investors and maintain an orderly market. The
Exchange believes that the combination of encouraging TPHs to
participate on the market and allowing a safeguard to erroneous trades
will provide the best solution during the pilot of the Plan.
Next, the Exchange is proposing to modify Rule 6.10 and 6.13 and,
more specifically, how certain Exchange order types will be handled
while the underlying security of such orders enters into a limit up-
limit down state. The proposed rule change will, among

[[Page 16323]]

other things, address how market orders,\17\ market-on-close,\18\ stop
orders,\19\ and stock option orders \20\ will function on the Exchange
upon the implementation of the Plan. More specifically, the Exchange is
proposing to add language to clarify that: (a) Market orders will be
returned during limit up-limit down states, (b) market-on-close orders
will not be elected if the underlying security is in a limit up-limit
down state, (c) stop orders will be held while the underlying security
is in a limit up-limit down state, and (d) stock-option orders will
only execute if the calculated stock price is within the permissible
Price Bands.\21\ In addition, during a limit up-limit down state, if a
message is sent to replace a limit order with a market order, the
resting limit order will be cancelled and the replaced market order
will also be cancelled.
---------------------------------------------------------------------------

\17\ See Exchange Rule 6.10 which defines a market order as ``an
order to buy or sell a stated number of options contracts at the
best price available at the time of execution.''
\18\ See Exchange Rule 6.10(c)(2) which defines a market-on-
close order designation as an order ``to be executed as close as
possible to the closing bell, or during the closing rotation, and
should be near to or at the closing price for the particular series
of option contracts.
\19\ See Exchange Rule 6.10(c)(3) which defines a stop order
contingency to an order as one that ``to buy or sell when the market
for a particular option contract reaches a specified price on the
Exchange.''
\20\ See Exchange Rule 6.13(a)(2) which defines a stock-option
order as ``an order to buy or sell a stated number of units of an
underlying stock or a security convertible into the underlying stock
* * * coupled with the purchase or sale of options contract(s) on
the opposite side of the market.''
\21\ If the calculated price of a stock-option order is not
within the permissible Price Bands, the stock-option order will be
routed for manual handling.
---------------------------------------------------------------------------

When a stock is in a limit or straddle state, while options trading
will continue, there will not be a reliable price for a security to
serve as a benchmark for the price of the option. In addition, without
a reliable underlying stock price, there is an enhanced risk of errors
and improper executions. With these concerns in mind, the Exchange
believes that adding a level of certainty for TPHs will encourage
participation on the Exchange whilst the underlying securities are in
limit up-limit down states. Thus, the Exchange believes handling these
certain orders in this way will best protect the investor after the
implementation of the Plan by not allowing execution at unreasonable
prices due to the shift in the stock prices.
Finally, the Exchange is proposing to eliminate all market maker
obligations for options in which the underlying security is in a limit
state while the underlying security in is in the limit up-limit down
state. Currently, Exchange Rules 8.5 and 8.17 impose certain
obligations on Market-Makers and DPMs, respectively, including
obligations to provide continuous quotes as follows: \22\
---------------------------------------------------------------------------

\22\ For purposes of Rules 8.5(a)(1), and 8.17(a)(1),
``continuous'' means 90% of the time. If a technical failure of
limitation of the System prevents a Market-Maker from maintaining
timely and accurate quotes in a series, the duration of such failure
will not be included in the 90% determination.
---------------------------------------------------------------------------

Rule 8.5 requires that Market-Makers provide a continuous
two-sided market in 60% of the non-adjusted option series of the
Market-Maker's appointed class that have a time to expiration of less
than nine months;
Rule 8.17(a)(1) requires DPMs to provide continuous quotes
in at least the lesser of 99% or 100% minus one call-put pair \23\ of
the non-adjusted option series of each class allocated to it.
---------------------------------------------------------------------------

\23\ See Rule 8.17(a)(1) which defines a ``call-up pair'' as
``one call and one put that cover the same underlying instrument and
have the same expiration date and exercise price.''
---------------------------------------------------------------------------

Exchange Rule 8.19 provides that DPMs generally will receive the
participation entitlements in their assigned classes when quoting at
the best price if they satisfy their obligations and other conditions
set forth in the rules. Specifically, Rule 8.19 provides that the DPM
participation entitlement will be 50% when there is one Market-Maker
also quoting at the best price on the Exchange and 40% when there are
two Market-Makers also quoting at the best price on the Exchange.\24\
---------------------------------------------------------------------------

\24\ The participation entitlements of DPMs are based on the
number of contracts remaining after all public customer orders in
the book at the best price on the Exchange have been satisfied.
Additionally, a DPM may not be allocated a total quantity greater
than the quantity for which the DPM is quoting at the best price.
See Rules 8.19(b)(1)(B) and (C).
---------------------------------------------------------------------------

Because prices may be skewed due to the underlying security being
in a limit up-limit down state, the Exchange is proposing to eliminate
all Market-Maker quoting obligations in series of options that the
underlying security is currently in a limit up-limit down state.
Because of the direct relationship between an options price and the
price of the associated underlying security, the Exchange believes
eliminating all Market-Maker obligations in connection with the
implementation of the Plan is the most effective way to ensure the
options markets will not be compromised. Because a bid or offer of an
underlying security may not be executable due to a limit or straddle
state, the ability to hedge the purchase or sale of an option may not
be possible or, in the least, is at risk. Because of this reason, the
Exchange is anticipating that Exchange Market-Makers will be forced to
change behaviors. In addition, the Exchange believes other options
markets will be implementing similar changes. In an effort to protect
the investors in the options market while the underlying security is in
a limit up-limit down state, the Exchange believes that eliminating
quoting obligations is the more effective way for this protection.
The Exchange, however, is proposing that Market-Makers may still
receive participation entitlements pursuant to the proposed rules in
all series in their assigned classes in which they are quoting, even in
series in which they are not required to provide continuous electronic
quotes under the Exchange Rules. Market-Makers already receive
participation entitlements in series they are not required to quote.
For example, a DPM is currently required to provide continuous quotes
in at least 99% of the non-adjusted option series or 100% of the non-
adjusted series minus one call-put pair of each option class allocated
to it for 90% of the trading day.\25\ If the DPM elects to quote in
100% of the non-adjusted series in an option class allocated to it, it
will receive a participation entitlement in all of those series when
quoting at the best price, including the 1% of the series in which it
is not required to quote in. Thus, under the proposed rule change, the
market would continue to function as it does now. The Exchange believes
this benefit is appropriate, as it incentivizes Market-Makers to quote
in as many series as possible in their appointed classes, even those
series in which the Rules do not require them to continuously quote.
Thus, under the proposed rule change, the market would continue to
function as it does now with respect to how entitlements are allocated
to Market-Makers. The Exchange believes this benefit is appropriate, as
it incentivizes Market-Makers to quote in as many series as possible in
their appointed classes, even those series in which the underlying
security has entered into a limit up-limit down state. The Exchange is
attempting to better encourage Market-Makers to quote though they will
not be obligated to. If they do choose to quote, the Exchange believes
they should be entitled to receive the Entitlement for such quoting as
appropriate.
---------------------------------------------------------------------------

\25\ See Rule 8.17(a).
---------------------------------------------------------------------------

The Exchange believes the combination of these modifications will
protect investors because when an underlying security is in a limit or
straddle state, there will not be a reliable price for the security to
serve as a benchmark for the price of the option.

[[Page 16324]]

In addition, the width of the markets might be compromised and, thus,
the quality of execution for retail customers. At the same time, the
Exchange believes the proposed rule change will create more certainty
on the options markets encouraging more investors to participate
despite the changes associated with the Plan.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\26\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \27\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitation
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \28\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------

\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
\28\ Id.
---------------------------------------------------------------------------

In particular, the Exchange believes the proposed changes will be
in accordance with the Act as they are merely intended to ensure the
options markets will continue to remain just and equitable with the
implementation of the Plan which is intended to reduce the negative
impacts of a sudden, unanticipated price movement in NMS stocks. The
proposed rule changes would promote this intention in the options
markets while protecting investors participating there. In addition,
similar rule changes will be adopted by other markets in the national
market system in a coordinated manner promoting the public interest.
Creating a more orderly market will promote just and equitable
principles of trade by allowing investors to feel more secure in their
participation in the national market system after the implementation of
the Plan.

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

C2 does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Specifically, the Exchange
believes the proposed changes will not impose any burden on intramarket
competition because it applies to all TPHs equally. The Exchange does
not believe the proposed changes will impose any burden on intermarket
competition as the changes are merely being made to protect investors
with the implementation of the Plan. In addition, the propose changes
will provide certainty of treatment and execution of options orders
during periods of extraordinary market volatility.

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 (i) as the Commission may
designate up to 90 days of such date 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 such 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-C2-2013-013 on the subject line.

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-C2-2013-013. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-C2-2013-013 and should be
submitted on or before March 29, 2013.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05885 Filed 3-13-13; 8:45 am]
BILLING CODE 8011-01-P

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