Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules Related to Execution and Priority, 45196-45200 [2016-16379]
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Federal Register / Vol. 81, No. 133 / Tuesday, July 12, 2016 / Notices
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact Brent J. Fields from the Office of
the Secretary at (202) 551–5400.
Dated: July 7, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016–16497 Filed 7–8–16; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Rules Related to
Execution and Priority
July 6, 2016.
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 June 29,
2016, C2 Options Exchange,
Incorporated (‘‘C2’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III, below, which Items
have been prepared by the Exchange.
The Exchange filed the proposal as a
‘‘non-controversial’’ proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
rules related to execution and priority.
The text of the proposed rule change is
available on the Exchange’s Web site
(https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
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In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–78235; File No. SR–C2–
2016–010]
1 15
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The proposed rule change amends
C2’s execution and priority rules to
more accurately reflect current System
functionality and make other technical
and nonsubstantive changes. First, the
proposed rule change amends Rule
6.12(a) to provide the price-time and pro
rata priority algorithms apply to orders
and quotes. The current rule text states
these trading priority allocations apply
only to orders; however, the System
applies these rules of trading priority to
resting orders and quotes, which is
consistent with the Exchange’s intention
and, the Exchange believes,
Participants’ expectations.5 Resting
quotes may trade with incoming orders
in the same manner as resting orders,
and the proposed rule change merely
updates the rule text to explicitly state
this. The proposed rule change also
makes nonsubstantive changes to Rule
6.12(a), including correcting
punctuation and using consistent
language in both subparagraphs (1) and
(2).6
Second, the proposed rule change
amends Rule 6.12(a)(2) to add detail
regarding how the System distributes
contracts pursuant to the pro-rata
algorithm and rounds fractions of
contracts. Current Rule 6.12(a)(2) states
resting orders are prioritized according
5 Previous rule filings state these rules of trading
priority apply to the allocation of both resting
orders and quotes. See, e.g., SR–C2–2010–005.
Additionally, Rule 6.12(a)(2) states an additional
contract (if contracts cannot be distributed equally
among Participants) will be distributed to the
Participant whose quote or order has time priority,
supporting the rule’s applicability to orders and
quotes.
6 The proposed rule change similarly amends
Rules 6.12(b)(1), 6.12(h), 6.16, 6.18(d), 6.34(d), and
6.51(b)(2)(B) to include references to quotes in rule
provisions that currently only reference orders but
also apply in the same manner to quotes.
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to price, and if there are two or more
orders at the best price, then trades are
allocated proportionally according to
size (in a pro rata fashion). Executable
quantity is allocated to the nearest
whole number, with fractions 1⁄2 or
greater rounded up and fractions less
than 1⁄2 rounded down. If there are two
market participants that both are
entitled to an additional 1⁄2 contract and
there is only one contract remaining to
be distributed, the additional contract
will be distributed to the participant
whose quote or order has time priority.
This is consistent with System
functionality; however, it represents
only one example (a situation in which
there are two market participants and
only one remaining contract) rather than
a general rule regarding allocations of
contracts that cannot be allocated
proportionally in whole numbers. For
example, three market participants may
be entitled to an additional fraction of
a contract.
The proposed rule change amends
this provision to state if there are two or
more resting orders or quotes at the best
price, then the System allocates
contracts from an incoming order or
quote to resting orders and quotes
sequentially in the order in which the
System received them (i.e., according to
time) proportionally according to size
(i.e., on a pro rata basis). The System
allocates contracts to the first resting
order or quote proportionally according
to size (based on the number of
contracts to be allocated and the size of
the resting orders and quotes). Then, the
System recalculates the number of
contracts to which each remaining
resting order and quote is afforded
proportionally according to size (based
on the number of remaining contracts to
be allocated and the size of the
remaining resting quotes and orders)
and allocates contracts to the next
resting order or quote. The System
repeats this process until it allocates all
contracts from the incoming order or
quote. The System rounds fractions 1⁄2
or greater up and fractions less than 1⁄2
down prior to each allocation. This
proposed provision is consistent with
the current rule that states contracts are
distributed to quotes and orders in time
priority. It adds detail regarding the
sequential nature of the allocation
process and applies the provision to
situations in which any number of
orders or quotes may be entitled to nonwhole numbers of contracts. The
Exchange believes this is a fair,
objective process and simple systematic
process to allocate ‘‘extra’’ contracts
when more than one market participant
may be entitled to those extra contracts
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after rounding. The following examples
demonstrate this process:
• Example 1: Suppose there are three
resting orders at the same price with
sizes of 30 (Order A), 20 (Order B) and
10 (Order C) (received by the System in
that order), and an incoming order with
size of 15 is marketable against those
three orders. The System first allocates
8 contracts to Order A (1/2 of 15 is 7.5,
which rounds to 8). After this
allocation, the System allocates 5 of the
7 remaining contracts to Order B (2/3 of
7 is 4.7, which rounds to 5), and then
allocates the remaining 2 contracts to
Order C.
• Example 2: Suppose there are three
resting orders at the same price with
sizes of 10 (Order A), 20 (Order B) and
30 (Order C) (received by the System in
that order), and an incoming order with
size of 15 is marketable against those
three orders. The System first allocates
3 contracts to Order A (1/6 of 15 is 2.5,
which rounds to 3). After this
allocation, the System allocates 5 of the
12 remaining contracts to Order B (2/5
of 12 is 4.8, which rounds to 5), and
then allocates the remaining 7 contracts
to Order C.
• Example 3: Suppose there are three
resting orders A, B and C (received by
the System in that order) at the same
price, each with a size of 50, and an
incoming order with size of 100 is
marketable against those three orders.
The System first allocates 33 contracts
to Order A (1/3 of 100 is 33.3, which
rounds to 33). After this allocation, the
System allocates 34 of the 67 remaining
contracts to Order B (1/2 of 67 is 33.5,
which rounds to 34), and then allocates
the remaining 33 contracts to Order C.
Third, the proposed rule change
amends Rule 6.12(a)(3)(B) to delete
subparagraphs (i) through (iv) (as well
as the introductory sentence to those
subparagraphs, as it is no longer
necessary with the deletion of the listed
items). Currently, subparagraph (B)
states when allocating the participation
right of a Preferred Market-Maker
(‘‘PMM’’) or Designated Primary MarketMaker (‘‘DPM’’) pursuant to Rule 8.13 or
8.19, respectively, the following apply:
• To be entitled to their participation
right, a PMM’s or DPM’s order and/or
quote must be at the best price on the
Exchange (i.e., the Exchange’s best bid
or offer (‘‘BBO’’)).
• a PMM or 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.
• in establishing the counterparties to
a particular trade, the PMM’s or DPM’s
participation right must first be counted
against the PMM’s or DPM’s, as
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applicable, highest priority bids or
offers.
• the participation right shall only
apply to any remaining balance of an
order once all higher priorities are
satisfied.
Each of these four conditions must be
satisfied in order for a PMM or DPM to
receive a participation right, and that
will continue to be the case. However,
the first, second and fourth condition
are all included in Rules 8.13 and 8.19
regarding PMM and DPM participation
rights, respectively.7 Therefore, the
Exchange proposes to delete these
provisions from Rule 6.12, as they are
duplicative, and instead state a PMM or
DPM is entitled to a participation right
if it satisfies the conditions in Rule 8.13
or 8.19, respectively. The Exchange
notes the rule text being deleted states
a PMM’s or DPM’s participation right is
based on its order and/or quote;
however, Rules 8.13 and 8.19 provide
its participation right is based on its
quote. Rules 8.13 and 8.19 are
consistent with how the System
determines a PMM’s or DPM’s
entitlement to a participation right,
which is consistent with the Exchange’s
intention and, the Exchange believes,
Participant’s expectations. As PMMs
and DPMs having heightened quoting
obligations under Rules 8.13 and 8.17,
which make them eligible for the
entitlement, the Exchange believes it is
appropriate for the entitlement to be
based on their quotes and not any
resting orders they may also have at the
same price. The Exchange believes
deleting the provisions referenced above
in Rule 6.12(a)(3)(B) will eliminate any
potential confusion regarding how the
System determines a PMM’s or DPM’s
participation right.
Additionally, subparagraph (iii) states
in establishing the counterparties to a
particular trade, the participation
entitlement must first be counted
against the PMM’s or DPM’s, as
applicable, highest priority bids or
offers. For a PMM or DPM to receive an
7 See Rules 8.13(b)(ii), (c)(i), and (c)(ii),
respectively, and 8.19(b)(1)(A), (b)(1)(B) and
(b)(1)(C), respectively. Note the proposed rule
change amends Rules 8.13(c)(ii) and 8.19(b)(1)(C) to
provide the participation entitlement is based on
the number of contracts remaining after all higher
priority orders have been satisfied rather than
public customer orders. This is consistent with
current Rule 6.12(a)(3)(B)(iv) and System
functionality. If the Exchange has applied public
customer priority to a class, those orders would be
filled prior to a PMM or DPM participation
entitlement. However, if the Exchange has applied
another priority to a class at a higher priority than
the participation entitlement, such as market turn
priority, those orders at the higher priority would
also be filled prior to a PMM or DPM participation
entitlement consistent with their higher priority
status.
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45197
entitlement, it must have a quote at the
BBO. A Market-Maker firm may have
multiple individual Market-Makers
submitting quotes within a class. An
entitlement will apply to a PMM’s or
DPM’s quotes with highest priority (i.e.,
the best price if the price is the BBO)
and will not apply to quotes of the same
PMM or DPM firm at a lower price. The
general allocation and priority rules
provide contracts are allocated to quotes
with the highest priority, a PMM or
DPM must be quoting at the BBO, and
the PMM or DPM may not be allocated
a quantity greater than the quantity of
its quote at that price. The Exchange
believes this provision is therefore
redundant and proposes to delete it.
Fourth, the proposed rule change
amends Rules 8.13(c) and 8.19(b)(2)
related to the participation rights of
PMMs and DPMs. Currently, Rule
8.13(c) and 8.19(b)(2) each provide that
a PMM or DPM participation
entitlement, respectively, is 50% if there
is one other Market-Maker also quoting
at the BBO and 40% if there are two or
more Market-Makers also quoting at the
BBO. The proposed rule change
provides that each of the PMM and DPM
participation entitlement is based on
both the number of Market-Maker
quotes and non-public customer orders
(including orders of professionals and
voluntary professionals) 8 at the BBO.9
This is consistent with current System
functionality. Additionally, the current
rule considers whether other MarketMakers are quoting at the best price,
because Market-Makers provide
liquidity to C2’s market and are
encouraged to do so if they have the
opportunity to participate in a larger
portion of a trade in which a PMM or
DPM has a participation right. Other
Participants besides Market-Makers
provide liquidity to C2’s market through
orders, and the Exchange believes those
8 Pursuant to Rule 1.1, professionals and
voluntary professionals will be treated as brokerdealers for purposes of Rule 8.13 (as well as other
rules related to allocation and priority). The
proposed rule change amends the definitions of
professional and voluntary professional in Rule 1.1
to provide that professionals and voluntary
professionals will be treated as broker-dealers for
purposes of Rule 8.19 as well. It was the intent of
those definitions for professionals and voluntary
professionals to be treated as broker-dealers under
all rules related to allocation and priority; the
Exchange is adding Rule 8.19 to the list of rules in
those definitions, as it was inadvertently omitted
from the list.
9 The proposed rule change makes a
corresponding change to Rule 8.13, Interpretation
and Policy .01(b) related to the PMM participation
entitlement with respect to complex orders. The
proposed rule change also amends Rules 8.13(c)
and Interpretation and Policy .01(b) and 8.19(b) to
use terms already defined in Rule 1.1 (BBO and
Public Customer), as well as to make other
nonsubstantive changes.
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Participants, like Market-Makers, should
have the same opportunity with respect
to non-pubic customer orders.
The proposed rule change also
provides that the participation
entitlement will be the greater of the
amount the PMM or DPM, as applicable,
would otherwise receive pursuant to the
algorithm applicable to the class and
40% when there are two or more other
Market-Maker quotes or non-Public
Customer orders at the BBO or 50%
when there is only one other Marketmaker quote or non-Public Customer
order at the BBO, but no fewer than one
contract.10 This change is consistent
with current System functionality as
well as the intent of the participation
entitlement, which is to provide PMMs
and DPMs with a benefit for their
heightened quoting obligations.11 The
proposed change providing the
participation entitlement may be the
amount the PMM or DPM, as applicable,
would otherwise receive pursuant to the
applicable algorithm is appropriate,
because the participation entitlement
could harm rather than benefit the PMM
or DPM if its quote was large enough it
would, for example, receive 60% of the
contract based on the pro rata algorithm.
This encourages PMMs and DPMs to
quote larger sizes, which increases
liquidity and ultimately benefits
investors. This proposed change is also
consistent with the rules of other
exchanges.12
With respect to the proposed change
stating a PMM or DPM, as applicable,
may receive no fewer than one contract
pursuant to the participation
entitlement, because fractions of
contracts of less than 1⁄2 are rounded
down, as discussed above, a transaction
involving a small number of contracts
may result in zero contracts being
allocated to a PMM or DPM who should
otherwise have priority. For example, if
there is one contract left after an order
trades with a public customer order, and
there is a DPM and two other MarketMakers quoting at the BBO, 40% of one
would give the DPM zero contracts, as
10 The proposed rule change also amends Rule
8.19(b)(2) to state the DPM participation entitlement
will be 30% when there are three or more other
Market-Maker quotes or non-Public Customer
orders at the BBO (and thus amends the previous
clause to state the DPM participation entitlement
will be 40% when there are two other MarketMaker quotes or non-Public Customer orders at the
BBO, rather than two or more). This third level of
the participation entitlement encourages other
market participants to quote and is consistent with
the rules of another exchange. See, e.g., Chicago
Board Options Exchange, Incorporated (‘‘CBOE’’)
Rule 8.87(b)(2).
11 See Rules 8.13 and 8.17, respectively.
12 See CBOE Rules 6.45A(a)(i)(C) and
6.45B(a)(ii)(C); and Miami International Securities
Exchange, LLC (‘‘MIAX’’) Rule 514(g)(1) and (h)(1).
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0.4 would round down to zero.13 Thus,
this proposed rule change is intended to
ensure that a PMM or DPM would
receive a contract in this situation to
continue to encourage PMMs or DPMs
to provide liquidity on the Exchange.
Fifth, the Exchange proposes to
update Rule 6.12(c) regarding the
priority of contingency orders.
Currently, Rule 6.12(c) states, regardless
of the allocation method in place,
contingency orders (except elected stoplimit orders and the displayed portion
of a reserve order) are placed last in
priority order, regardless of when they
were entered into the System. A
contingency order that was entered
before a limit order for the same security
at the same price will be treated as if it
were entered after the limit order. If
public customer priority is afforded to a
particular security, public customer
contingency orders will have priority
over non-public customer contingency
orders but behind all other orders.
The Exchange proposes to replace that
provision to add more detail regarding
the prioritization of contingency orders.
Proposed Rule 6.12(c) states once a
certain event or trading condition
satisfies an order’s contingency, an
order is no longer a contingency order
and is treated as a market or limit order
(as applicable), prioritized in the same
manner as any other market or limit
order based on the time it enters the
book following satisfaction of the
contingency (i.e., last in time priority
with respect to other orders and quotes
resting in the book at that time).14 If
contingencies of multiple orders are
satisfied at the same time, the System
sends them to the book in the order in
which the System initially received
them.
Notwithstanding the foregoing, under
any algorithm in Rule 6.12 15:
(1) Upon receipt of a reserve order, the
System displays in the book any initially
display-eligible portion of the reserve order,
13 The contract would ultimately go to the
Market-Maker who entered its quote first, as
discussed above, which may not be the PMM or
DPM.
14 The System generally bases priority of a noncontingency order on the time the System receives
it.
15 As provided in current Rule 6.12(a), all
displayed orders at a given price have priority over
the non-displayed portion of a reserve order at the
same price. This is also consistent with the
definition of reserve orders in current Rule
6.10(c)(8). The proposed rule change moves this
provision to proposed subparagraph (c)(1) so all
provisions of this rule regarding priority of
contingency orders are included in the same
paragraph. The proposed rule change also adds allor-none orders to this provision, as those are also
not displayed until their contingencies are
triggered, similar to the non-displayed portions of
reserve orders.
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which is prioritized in the same manner as
any other order (i.e., based on the time the
System receives it). Once any non-displayed
portion of a reserve order becomes eligible
for display, the System displays in the book
that portion of the order and prioritizes it
based on the time it becomes displayed in the
book (i.e., last in time priority with respect
to other orders and quotes resting in the book
at that time).
(2) Immediate-or-cancel and fill-or-kill
orders are not placed in the book and thus
are not prioritized with respect to other
resting orders and quotes in the book (by
definition, those types of orders are cancelled
if they do not execute as soon as they are
represented on the Exchange so have no
opportunity to rest in the book). These orders
execute against resting orders and quotes in
the book based on the time the System
receives them (i.e., the System processes
these orders in the time sequence in which
it receives them).
(3) all-or-none orders are always last in
priority (including after the undisplayed
portions of reserve orders). If the Exchange
applies public customer priority to a class,
orders trade in the following order: (A)
Public customer orders other than all-ornone, (B) non-public customer orders other
than all-or-none and quotes, (C) public
customer all-or-none orders (in time
sequence), and (D) non-public customer allor-none orders (in time sequence). If the
Exchange applies pro-rata with no public
customer priority or price-time to a class,
orders trade in the following order: (A) orders
other than all-or-none and quotes, and (B) allor-none orders (in time sequence).16
The Exchange believes this provision
is consistent with the definitions of
these order types, pursuant to which
most contingency orders become market
or limit orders once the contingency is
satisfied. All-or-none orders must
always be last in priority to ensure that
there is sufficient size to satisfy the
condition of such an order to trade in its
entirety after all other orders at the same
price have executed. Additionally, the
Exchange believes it is reasonable for
orders that are not displayed in the book
to not receive priority over orders that
are displayed, as they are not yet
eligible for execution until they become
displayed. These provisions are
consistent with current System
functionality and are merely adding
more detail to the rules to provide
additional transparency regarding
allocation and priority principles for
investors. These provisions are also
consistent with the non-inclusion of allor-none orders and non-displayed
portions of reserve orders in the NBBO.
Sixth, the proposed rule change
amends Rule 6.12(e) regarding how
modification of an order or quote may
change its priority position. The
16 Note other priorities may be applied to the
class as well and would function as set forth in the
rules.
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proposed rule change amends Rule
6.12(e)(1) to clarify the provision
applies to changing the price of a quote
or order. This is consistent with the
intention of the rule, including the final
part of the provision that indicates
priority is determined as if the order/
quote was just received. However,
reference in the rule to ‘‘changed side’’
(which applies to a quote) but not an
order may create confusion for a market
participant, who may mistakenly
believe this provision only applies to
quotes. Additionally, the proposed rule
change amends Rule 6.12(e)(2) to clarify
if the price or quantity of one side of a
quote is changed, the unchanged side
retains its priority position. This is
consistent with the provision in
subparagraph (1), which provides
changing the price of a quote only
changes the priority position of the
changed side of the quote; the proposed
rule change explicitly states that the
unchanged side retains its position. The
Exchange believes these changes will
eliminate any potential confusion.
Finally, the proposed rule change
amend Rule 6.12(f) to clarify the
meaning of the provision. Current
paragraph (f) states unless expressly
stated otherwise, any potential price
improvement resulting from an
execution in the System shall accrue to
the party that is removing liquidity
previously posted in the System.
Proposed paragraph (f) states, unless
expressly stated otherwise, any
potential price improvement resulting
from an execution in the System accrues
to the incoming order or quote that
removes liquidity previously posted in
the System. For example, suppose the
market for a series is 1.00 to 1.20. A
limit order in that series to buy for 1.25
enters the System. The System will
provide price improvement to that
incoming order and execute the order
against the resting offer of 1.20. This is
merely a clarification of the rule text
and does not change any System
functionality.
The proposed rule change makes
nonsubstantive changes to Rules
6.12(b)(1), (e) and (h), 6.18(d) and
8.13(c) and Interpretation and Policy
.01, including to fix punctuation and
use defined terms, plain English, and
language consistent with that used in
similar rule provisions. In addition, the
proposed rule change amends Rule
6.12(b)(1) to provide the Market Turner
priority percentage may be reduced on
a class-by-class basis rather than seriesby-series basis, as the Exchange
generally makes this determination for
an entire class rather than for specific
series.
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2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.17 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 18 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 19 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposed rule
change amends execution and priority
rules to more accurately reflect System
functionality, which transparency
protects investors and perfects the
mechanism of a free and open market.
The proposed rule change to provide
quotes, in addition to orders, are subject
to price-time and pro rata priority
promotes just and equitable principles
of trade, as resting quotes trade with
incoming orders in the same manner as
resting orders. The proposed change
regarding how the System rounds the
number of contracts when they cannot
be allocated proportionally in whole
numbers pursuant to the pro-rata
algorithm adds detail to the rules
(which previously only addressed the
situation if there one additional contract
for two market participants) regarding
the allocation process and provides a
fair, objective manner for rounding and
distribution in all situations in which
the number of contracts many not be
allocated proportionally in whole
numbers. Distributing contracts to
resting orders and quotes in time
priority when they cannot be allocated
proportionally in whole numbers is also
consistent with C2’s current rules as
well as the rules of another options
exchange.20 The Exchange believes
adding these details to the rules, as well
17 15
18 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
19 Id.
NASDAQ OMX BX, Inc. (‘‘BX’’) Chapter VI,
Section 10(1)(B).
PO 00000
Frm 00079
as the technical and nonsubstantive
changes to the rules, will better enable
investors to understand how the System
allocates trades and affords priority. The
proposed rule change does not change
how the System allocates and prioritizes
orders and quotes; thus, orders and
quotes will be subject to the same
priority principles as they are today.
The proposed rule change to delete
from Rule 6.12 the conditions a PMM or
DPM must satisfy to be entitled to a
participation right eliminates
duplication and confusion, a these
conditions are also contained in Rules
8.13 and 8.19, which protects investors.
The proposed rule change providing a
PMM’s or DPM’s participation right is
determined in part by how many
Market-Maker quotes and non-public
customer orders are at the BBO is not
only consistent with current System
functionality but also encourages all
Market-Makers, not just Trading Permit
Holders, to continue to provide liquidity
to the market because it may provide
them with the opportunity to participate
in a larger portion of a trade in which
a PMM or DPM has a participation right
(60% v. 50%). PMMs, and DPMs will
still be entitled to a significant
participation right of 40% or 50%, as
applicable, which continues to provide
an appropriate balance with their
heightened quoting obligations. The
proposed rule change to provide a
DPM’s participation right will be 30% if
there are three or more Market-Maker
quotes or non-Public Customer orders at
the BBO will further promote other
market participants to participate in a
larger portion of a trade and thus further
encourage liquidity from these other
market participants, and is also
consistent with the rules of another
exchange.21 This additional liquidity
will ultimately benefit investors. The
proposed rule change that a PMM or
DPM may receive the amount it would
otherwise receive pursuant to the
applicable algorithm if greater than the
percentage specified in the rule will
ensure PMMs and DPMs are not harmed
by the participation entitlements, which
are intended to be a benefit. This will
encourage PMMs and DPMs to quote
larges sizes, which will benefit
investors, and is consistent with the
rules of other exchanges.22 Similarly,
the proposed rule change that the PMM
or DPM participation entitlement may
not be fewer than one contract when
there are other Market-Maker quotes or
non-Public Customer orders ensures
PMMs and DPMs will receive a benefit
21 See
20 See
Fmt 4703
Sfmt 4703
45199
CBOE Rule 8.87(b)(2).
CBOE Rules 6.45A(a)(i)(C) and
6.45B(a)(ii)(C); and MIAX Rule 514(g)(1) and (h)(1).
22 See
E:\FR\FM\12JYN1.SGM
12JYN1
45200
Federal Register / Vol. 81, No. 133 / Tuesday, July 12, 2016 / Notices
in exchange for their heightened quoting
obligations when executions involve
small number of contracts.
The proposed rule changes regarding
the priority of contingency orders,
modified orders and quotes, and price
improvement to incoming orders and
quotes eliminate potential confusion,
promote just and equitable principles of
trade, and thus protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
C2 does not believe that the proposed
rule change will impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The proposed rule
change is consistent with how the
System currently executes and
prioritizes orders and quotes and
primarily adds detail to the rules
regarding current System functionality.
Thus, the System will allocate orders
and quotes under the proposed rule
change in the same manner as it does
today. The proposed rule change applies
in the same manner to the orders and
quotes of all Trading Permit Holders,
and the additional transparency in the
rules benefits all investors. The
proposed rule change applies only to
the allocation of orders and quotes in
C2’s System.
mstockstill on DSK3G9T082PROD with NOTICES
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
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate,
it has become effective pursuant to
Section 19(b)(3)(A) of the Act 23 and
Rule 19b–4(f)(6) 24 thereunder. At any
time within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
23 15
24 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
VerDate Sep<11>2014
18:30 Jul 11, 2016
Jkt 238001
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission will
institute proceedings to determine
whether the proposed rule change
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
C2–2016–010 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–C2–2016–010. 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–C2–
2016–010 and should be submitted on
or before August 2, 2016.
PO 00000
Frm 00080
Fmt 4703
Sfmt 9990
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Brent J. Fields,
Secretary.
[FR Doc. 2016–16379 Filed 7–11–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission Investor Advisory
Committee will hold a meeting on
Thursday, July 14, 2016, in MultiPurpose Room LL–006 at the
Commission’s headquarters, 100 F
Street NE., Washington, DC 20549. The
meeting will begin at 9:30 a.m. (ET) and
will be open to the public. Seating will
be on a first-come, first-served basis.
Doors will open at 9 a.m. Visitors will
be subject to security checks. The
meeting will be webcast on the
Commission’s Web site at www.sec.gov.
On June 22, 2016, the Commission
issued notice of the Committee meeting
(Release No. 33–10102), indicating that
the meeting is open to the public
(except during that portion of the
meeting reserved for an administrative
work session during lunch), and
inviting the public to submit written
comments to the Committee. This
Sunshine Act notice is being issued
because a quorum of the Commission
may attend the meeting.
The agenda for the meeting includes:
Remarks from Commissioners; a
discussion of the state of sustainability
reporting; a discussion regarding
investment company reporting
modernization; and a nonpublic
administrative work session during
lunch.
For further information, please
contact Brent J. Fields from the Office of
the Secretary at (202) 551–5400.
Dated: July 7, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016–16496 Filed 7–8–16; 11:15 am]
BILLING CODE 8011–01–P
25 17
E:\FR\FM\12JYN1.SGM
CFR 200.30–3(a)(12).
12JYN1
]]>Agencies
[Federal Register Volume 81, Number 133 (Tuesday, July 12, 2016)]
[Notices]
[Pages 45196-45200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16379]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78235; File No. SR-C2-2016-010]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend Rules Related to Execution and Priority
July 6, 2016.
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 June 29, 2016, C2 Options Exchange, Incorporated (``C2'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III, below, which Items have been prepared by the Exchange. The
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules related to execution and
priority. The text of the proposed rule change is available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change amends C2's execution and priority rules
to more accurately reflect current System functionality and make other
technical and nonsubstantive changes. First, the proposed rule change
amends Rule 6.12(a) to provide the price-time and pro rata priority
algorithms apply to orders and quotes. The current rule text states
these trading priority allocations apply only to orders; however, the
System applies these rules of trading priority to resting orders and
quotes, which is consistent with the Exchange's intention and, the
Exchange believes, Participants' expectations.\5\ Resting quotes may
trade with incoming orders in the same manner as resting orders, and
the proposed rule change merely updates the rule text to explicitly
state this. The proposed rule change also makes nonsubstantive changes
to Rule 6.12(a), including correcting punctuation and using consistent
language in both subparagraphs (1) and (2).\6\
---------------------------------------------------------------------------
\5\ Previous rule filings state these rules of trading priority
apply to the allocation of both resting orders and quotes. See,
e.g., SR-C2-2010-005. Additionally, Rule 6.12(a)(2) states an
additional contract (if contracts cannot be distributed equally
among Participants) will be distributed to the Participant whose
quote or order has time priority, supporting the rule's
applicability to orders and quotes.
\6\ The proposed rule change similarly amends Rules 6.12(b)(1),
6.12(h), 6.16, 6.18(d), 6.34(d), and 6.51(b)(2)(B) to include
references to quotes in rule provisions that currently only
reference orders but also apply in the same manner to quotes.
---------------------------------------------------------------------------
Second, the proposed rule change amends Rule 6.12(a)(2) to add
detail regarding how the System distributes contracts pursuant to the
pro-rata algorithm and rounds fractions of contracts. Current Rule
6.12(a)(2) states resting orders are prioritized according to price,
and if there are two or more orders at the best price, then trades are
allocated proportionally according to size (in a pro rata fashion).
Executable quantity is allocated to the nearest whole number, with
fractions \1/2\ or greater rounded up and fractions less than \1/2\
rounded down. If there are two market participants that both are
entitled to an additional \1/2\ contract and there is only one contract
remaining to be distributed, the additional contract will be
distributed to the participant whose quote or order has time priority.
This is consistent with System functionality; however, it represents
only one example (a situation in which there are two market
participants and only one remaining contract) rather than a general
rule regarding allocations of contracts that cannot be allocated
proportionally in whole numbers. For example, three market participants
may be entitled to an additional fraction of a contract.
The proposed rule change amends this provision to state if there
are two or more resting orders or quotes at the best price, then the
System allocates contracts from an incoming order or quote to resting
orders and quotes sequentially in the order in which the System
received them (i.e., according to time) proportionally according to
size (i.e., on a pro rata basis). The System allocates contracts to the
first resting order or quote proportionally according to size (based on
the number of contracts to be allocated and the size of the resting
orders and quotes). Then, the System recalculates the number of
contracts to which each remaining resting order and quote is afforded
proportionally according to size (based on the number of remaining
contracts to be allocated and the size of the remaining resting quotes
and orders) and allocates contracts to the next resting order or quote.
The System repeats this process until it allocates all contracts from
the incoming order or quote. The System rounds fractions \1/2\ or
greater up and fractions less than \1/2\ down prior to each allocation.
This proposed provision is consistent with the current rule that states
contracts are distributed to quotes and orders in time priority. It
adds detail regarding the sequential nature of the allocation process
and applies the provision to situations in which any number of orders
or quotes may be entitled to non-whole numbers of contracts. The
Exchange believes this is a fair, objective process and simple
systematic process to allocate ``extra'' contracts when more than one
market participant may be entitled to those extra contracts
[[Page 45197]]
after rounding. The following examples demonstrate this process:
Example 1: Suppose there are three resting orders at the
same price with sizes of 30 (Order A), 20 (Order B) and 10 (Order C)
(received by the System in that order), and an incoming order with size
of 15 is marketable against those three orders. The System first
allocates 8 contracts to Order A (1/2 of 15 is 7.5, which rounds to 8).
After this allocation, the System allocates 5 of the 7 remaining
contracts to Order B (2/3 of 7 is 4.7, which rounds to 5), and then
allocates the remaining 2 contracts to Order C.
Example 2: Suppose there are three resting orders at the
same price with sizes of 10 (Order A), 20 (Order B) and 30 (Order C)
(received by the System in that order), and an incoming order with size
of 15 is marketable against those three orders. The System first
allocates 3 contracts to Order A (1/6 of 15 is 2.5, which rounds to 3).
After this allocation, the System allocates 5 of the 12 remaining
contracts to Order B (2/5 of 12 is 4.8, which rounds to 5), and then
allocates the remaining 7 contracts to Order C.
Example 3: Suppose there are three resting orders A, B and
C (received by the System in that order) at the same price, each with a
size of 50, and an incoming order with size of 100 is marketable
against those three orders. The System first allocates 33 contracts to
Order A (1/3 of 100 is 33.3, which rounds to 33). After this
allocation, the System allocates 34 of the 67 remaining contracts to
Order B (1/2 of 67 is 33.5, which rounds to 34), and then allocates the
remaining 33 contracts to Order C.
Third, the proposed rule change amends Rule 6.12(a)(3)(B) to delete
subparagraphs (i) through (iv) (as well as the introductory sentence to
those subparagraphs, as it is no longer necessary with the deletion of
the listed items). Currently, subparagraph (B) states when allocating
the participation right of a Preferred Market-Maker (``PMM'') or
Designated Primary Market-Maker (``DPM'') pursuant to Rule 8.13 or
8.19, respectively, the following apply:
To be entitled to their participation right, a PMM's or
DPM's order and/or quote must be at the best price on the Exchange
(i.e., the Exchange's best bid or offer (``BBO'')).
a PMM or 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.
in establishing the counterparties to a particular trade,
the PMM's or DPM's participation right must first be counted against
the PMM's or DPM's, as applicable, highest priority bids or offers.
the participation right shall only apply to any remaining
balance of an order once all higher priorities are satisfied.
Each of these four conditions must be satisfied in order for a PMM
or DPM to receive a participation right, and that will continue to be
the case. However, the first, second and fourth condition are all
included in Rules 8.13 and 8.19 regarding PMM and DPM participation
rights, respectively.\7\ Therefore, the Exchange proposes to delete
these provisions from Rule 6.12, as they are duplicative, and instead
state a PMM or DPM is entitled to a participation right if it satisfies
the conditions in Rule 8.13 or 8.19, respectively. The Exchange notes
the rule text being deleted states a PMM's or DPM's participation right
is based on its order and/or quote; however, Rules 8.13 and 8.19
provide its participation right is based on its quote. Rules 8.13 and
8.19 are consistent with how the System determines a PMM's or DPM's
entitlement to a participation right, which is consistent with the
Exchange's intention and, the Exchange believes, Participant's
expectations. As PMMs and DPMs having heightened quoting obligations
under Rules 8.13 and 8.17, which make them eligible for the
entitlement, the Exchange believes it is appropriate for the
entitlement to be based on their quotes and not any resting orders they
may also have at the same price. The Exchange believes deleting the
provisions referenced above in Rule 6.12(a)(3)(B) will eliminate any
potential confusion regarding how the System determines a PMM's or
DPM's participation right.
---------------------------------------------------------------------------
\7\ See Rules 8.13(b)(ii), (c)(i), and (c)(ii), respectively,
and 8.19(b)(1)(A), (b)(1)(B) and (b)(1)(C), respectively. Note the
proposed rule change amends Rules 8.13(c)(ii) and 8.19(b)(1)(C) to
provide the participation entitlement is based on the number of
contracts remaining after all higher priority orders have been
satisfied rather than public customer orders. This is consistent
with current Rule 6.12(a)(3)(B)(iv) and System functionality. If the
Exchange has applied public customer priority to a class, those
orders would be filled prior to a PMM or DPM participation
entitlement. However, if the Exchange has applied another priority
to a class at a higher priority than the participation entitlement,
such as market turn priority, those orders at the higher priority
would also be filled prior to a PMM or DPM participation entitlement
consistent with their higher priority status.
---------------------------------------------------------------------------
Additionally, subparagraph (iii) states in establishing the
counterparties to a particular trade, the participation entitlement
must first be counted against the PMM's or DPM's, as applicable,
highest priority bids or offers. For a PMM or DPM to receive an
entitlement, it must have a quote at the BBO. A Market-Maker firm may
have multiple individual Market-Makers submitting quotes within a
class. An entitlement will apply to a PMM's or DPM's quotes with
highest priority (i.e., the best price if the price is the BBO) and
will not apply to quotes of the same PMM or DPM firm at a lower price.
The general allocation and priority rules provide contracts are
allocated to quotes with the highest priority, a PMM or DPM must be
quoting at the BBO, and the PMM or DPM may not be allocated a quantity
greater than the quantity of its quote at that price. The Exchange
believes this provision is therefore redundant and proposes to delete
it.
Fourth, the proposed rule change amends Rules 8.13(c) and
8.19(b)(2) related to the participation rights of PMMs and DPMs.
Currently, Rule 8.13(c) and 8.19(b)(2) each provide that a PMM or DPM
participation entitlement, respectively, is 50% if there is one other
Market-Maker also quoting at the BBO and 40% if there are two or more
Market-Makers also quoting at the BBO. The proposed rule change
provides that each of the PMM and DPM participation entitlement is
based on both the number of Market-Maker quotes and non-public customer
orders (including orders of professionals and voluntary professionals)
\8\ at the BBO.\9\ This is consistent with current System
functionality. Additionally, the current rule considers whether other
Market-Makers are quoting at the best price, because Market-Makers
provide liquidity to C2's market and are encouraged to do so if they
have the opportunity to participate in a larger portion of a trade in
which a PMM or DPM has a participation right. Other Participants
besides Market-Makers provide liquidity to C2's market through orders,
and the Exchange believes those
[[Page 45198]]
Participants, like Market-Makers, should have the same opportunity with
respect to non-pubic customer orders.
---------------------------------------------------------------------------
\8\ Pursuant to Rule 1.1, professionals and voluntary
professionals will be treated as broker-dealers for purposes of Rule
8.13 (as well as other rules related to allocation and priority).
The proposed rule change amends the definitions of professional and
voluntary professional in Rule 1.1 to provide that professionals and
voluntary professionals will be treated as broker-dealers for
purposes of Rule 8.19 as well. It was the intent of those
definitions for professionals and voluntary professionals to be
treated as broker-dealers under all rules related to allocation and
priority; the Exchange is adding Rule 8.19 to the list of rules in
those definitions, as it was inadvertently omitted from the list.
\9\ The proposed rule change makes a corresponding change to
Rule 8.13, Interpretation and Policy .01(b) related to the PMM
participation entitlement with respect to complex orders. The
proposed rule change also amends Rules 8.13(c) and Interpretation
and Policy .01(b) and 8.19(b) to use terms already defined in Rule
1.1 (BBO and Public Customer), as well as to make other
nonsubstantive changes.
---------------------------------------------------------------------------
The proposed rule change also provides that the participation
entitlement will be the greater of the amount the PMM or DPM, as
applicable, would otherwise receive pursuant to the algorithm
applicable to the class and 40% when there are two or more other
Market-Maker quotes or non-Public Customer orders at the BBO or 50%
when there is only one other Market-maker quote or non-Public Customer
order at the BBO, but no fewer than one contract.\10\ This change is
consistent with current System functionality as well as the intent of
the participation entitlement, which is to provide PMMs and DPMs with a
benefit for their heightened quoting obligations.\11\ The proposed
change providing the participation entitlement may be the amount the
PMM or DPM, as applicable, would otherwise receive pursuant to the
applicable algorithm is appropriate, because the participation
entitlement could harm rather than benefit the PMM or DPM if its quote
was large enough it would, for example, receive 60% of the contract
based on the pro rata algorithm. This encourages PMMs and DPMs to quote
larger sizes, which increases liquidity and ultimately benefits
investors. This proposed change is also consistent with the rules of
other exchanges.\12\
---------------------------------------------------------------------------
\10\ The proposed rule change also amends Rule 8.19(b)(2) to
state the DPM participation entitlement will be 30% when there are
three or more other Market-Maker quotes or non-Public Customer
orders at the BBO (and thus amends the previous clause to state the
DPM participation entitlement will be 40% when there are two other
Market-Maker quotes or non-Public Customer orders at the BBO, rather
than two or more). This third level of the participation entitlement
encourages other market participants to quote and is consistent with
the rules of another exchange. See, e.g., Chicago Board Options
Exchange, Incorporated (``CBOE'') Rule 8.87(b)(2).
\11\ See Rules 8.13 and 8.17, respectively.
\12\ See CBOE Rules 6.45A(a)(i)(C) and 6.45B(a)(ii)(C); and
Miami International Securities Exchange, LLC (``MIAX'') Rule
514(g)(1) and (h)(1).
---------------------------------------------------------------------------
With respect to the proposed change stating a PMM or DPM, as
applicable, may receive no fewer than one contract pursuant to the
participation entitlement, because fractions of contracts of less than
\1/2\ are rounded down, as discussed above, a transaction involving a
small number of contracts may result in zero contracts being allocated
to a PMM or DPM who should otherwise have priority. For example, if
there is one contract left after an order trades with a public customer
order, and there is a DPM and two other Market-Makers quoting at the
BBO, 40% of one would give the DPM zero contracts, as 0.4 would round
down to zero.\13\ Thus, this proposed rule change is intended to ensure
that a PMM or DPM would receive a contract in this situation to
continue to encourage PMMs or DPMs to provide liquidity on the
Exchange.
---------------------------------------------------------------------------
\13\ The contract would ultimately go to the Market-Maker who
entered its quote first, as discussed above, which may not be the
PMM or DPM.
---------------------------------------------------------------------------
Fifth, the Exchange proposes to update Rule 6.12(c) regarding the
priority of contingency orders. Currently, Rule 6.12(c) states,
regardless of the allocation method in place, contingency orders
(except elected stop-limit orders and the displayed portion of a
reserve order) are placed last in priority order, regardless of when
they were entered into the System. A contingency order that was entered
before a limit order for the same security at the same price will be
treated as if it were entered after the limit order. If public customer
priority is afforded to a particular security, public customer
contingency orders will have priority over non-public customer
contingency orders but behind all other orders.
The Exchange proposes to replace that provision to add more detail
regarding the prioritization of contingency orders. Proposed Rule
6.12(c) states once a certain event or trading condition satisfies an
order's contingency, an order is no longer a contingency order and is
treated as a market or limit order (as applicable), prioritized in the
same manner as any other market or limit order based on the time it
enters the book following satisfaction of the contingency (i.e., last
in time priority with respect to other orders and quotes resting in the
book at that time).\14\ If contingencies of multiple orders are
satisfied at the same time, the System sends them to the book in the
order in which the System initially received them.
---------------------------------------------------------------------------
\14\ The System generally bases priority of a non-contingency
order on the time the System receives it.
---------------------------------------------------------------------------
Notwithstanding the foregoing, under any algorithm in Rule 6.12
\15\:
\15\ As provided in current Rule 6.12(a), all displayed orders
at a given price have priority over the non-displayed portion of a
reserve order at the same price. This is also consistent with the
definition of reserve orders in current Rule 6.10(c)(8). The
proposed rule change moves this provision to proposed subparagraph
(c)(1) so all provisions of this rule regarding priority of
contingency orders are included in the same paragraph. The proposed
rule change also adds all-or-none orders to this provision, as those
are also not displayed until their contingencies are triggered,
similar to the non-displayed portions of reserve orders.
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(1) Upon receipt of a reserve order, the System displays in the
book any initially display-eligible portion of the reserve order,
which is prioritized in the same manner as any other order (i.e.,
based on the time the System receives it). Once any non-displayed
portion of a reserve order becomes eligible for display, the System
displays in the book that portion of the order and prioritizes it
based on the time it becomes displayed in the book (i.e., last in
time priority with respect to other orders and quotes resting in the
book at that time).
(2) Immediate-or-cancel and fill-or-kill orders are not placed
in the book and thus are not prioritized with respect to other
resting orders and quotes in the book (by definition, those types of
orders are cancelled if they do not execute as soon as they are
represented on the Exchange so have no opportunity to rest in the
book). These orders execute against resting orders and quotes in the
book based on the time the System receives them (i.e., the System
processes these orders in the time sequence in which it receives
them).
(3) all-or-none orders are always last in priority (including
after the undisplayed portions of reserve orders). If the Exchange
applies public customer priority to a class, orders trade in the
following order: (A) Public customer orders other than all-or-none,
(B) non-public customer orders other than all-or-none and quotes,
(C) public customer all-or-none orders (in time sequence), and (D)
non-public customer all-or-none orders (in time sequence). If the
Exchange applies pro-rata with no public customer priority or price-
time to a class, orders trade in the following order: (A) orders
other than all-or-none and quotes, and (B) all-or-none orders (in
time sequence).\16\
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\16\ Note other priorities may be applied to the class as well
and would function as set forth in the rules.
The Exchange believes this provision is consistent with the
definitions of these order types, pursuant to which most contingency
orders become market or limit orders once the contingency is satisfied.
All-or-none orders must always be last in priority to ensure that there
is sufficient size to satisfy the condition of such an order to trade
in its entirety after all other orders at the same price have executed.
Additionally, the Exchange believes it is reasonable for orders that
are not displayed in the book to not receive priority over orders that
are displayed, as they are not yet eligible for execution until they
become displayed. These provisions are consistent with current System
functionality and are merely adding more detail to the rules to provide
additional transparency regarding allocation and priority principles
for investors. These provisions are also consistent with the non-
inclusion of all-or-none orders and non-displayed portions of reserve
orders in the NBBO.
Sixth, the proposed rule change amends Rule 6.12(e) regarding how
modification of an order or quote may change its priority position. The
[[Page 45199]]
proposed rule change amends Rule 6.12(e)(1) to clarify the provision
applies to changing the price of a quote or order. This is consistent
with the intention of the rule, including the final part of the
provision that indicates priority is determined as if the order/quote
was just received. However, reference in the rule to ``changed side''
(which applies to a quote) but not an order may create confusion for a
market participant, who may mistakenly believe this provision only
applies to quotes. Additionally, the proposed rule change amends Rule
6.12(e)(2) to clarify if the price or quantity of one side of a quote
is changed, the unchanged side retains its priority position. This is
consistent with the provision in subparagraph (1), which provides
changing the price of a quote only changes the priority position of the
changed side of the quote; the proposed rule change explicitly states
that the unchanged side retains its position. The Exchange believes
these changes will eliminate any potential confusion.
Finally, the proposed rule change amend Rule 6.12(f) to clarify the
meaning of the provision. Current paragraph (f) states unless expressly
stated otherwise, any potential price improvement resulting from an
execution in the System shall accrue to the party that is removing
liquidity previously posted in the System. Proposed paragraph (f)
states, unless expressly stated otherwise, any potential price
improvement resulting from an execution in the System accrues to the
incoming order or quote that removes liquidity previously posted in the
System. For example, suppose the market for a series is 1.00 to 1.20. A
limit order in that series to buy for 1.25 enters the System. The
System will provide price improvement to that incoming order and
execute the order against the resting offer of 1.20. This is merely a
clarification of the rule text and does not change any System
functionality.
The proposed rule change makes nonsubstantive changes to Rules
6.12(b)(1), (e) and (h), 6.18(d) and 8.13(c) and Interpretation and
Policy .01, including to fix punctuation and use defined terms, plain
English, and language consistent with that used in similar rule
provisions. In addition, the proposed rule change amends Rule
6.12(b)(1) to provide the Market Turner priority percentage may be
reduced on a class-by-class basis rather than series-by-series basis,
as the Exchange generally makes this determination for an entire class
rather than for specific series.
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.\17\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \18\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \19\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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In particular, the proposed rule change amends execution and
priority rules to more accurately reflect System functionality, which
transparency protects investors and perfects the mechanism of a free
and open market. The proposed rule change to provide quotes, in
addition to orders, are subject to price-time and pro rata priority
promotes just and equitable principles of trade, as resting quotes
trade with incoming orders in the same manner as resting orders. The
proposed change regarding how the System rounds the number of contracts
when they cannot be allocated proportionally in whole numbers pursuant
to the pro-rata algorithm adds detail to the rules (which previously
only addressed the situation if there one additional contract for two
market participants) regarding the allocation process and provides a
fair, objective manner for rounding and distribution in all situations
in which the number of contracts many not be allocated proportionally
in whole numbers. Distributing contracts to resting orders and quotes
in time priority when they cannot be allocated proportionally in whole
numbers is also consistent with C2's current rules as well as the rules
of another options exchange.\20\ The Exchange believes adding these
details to the rules, as well as the technical and nonsubstantive
changes to the rules, will better enable investors to understand how
the System allocates trades and affords priority. The proposed rule
change does not change how the System allocates and prioritizes orders
and quotes; thus, orders and quotes will be subject to the same
priority principles as they are today.
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\20\ See NASDAQ OMX BX, Inc. (``BX'') Chapter VI, Section
10(1)(B).
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The proposed rule change to delete from Rule 6.12 the conditions a
PMM or DPM must satisfy to be entitled to a participation right
eliminates duplication and confusion, a these conditions are also
contained in Rules 8.13 and 8.19, which protects investors. The
proposed rule change providing a PMM's or DPM's participation right is
determined in part by how many Market-Maker quotes and non-public
customer orders are at the BBO is not only consistent with current
System functionality but also encourages all Market-Makers, not just
Trading Permit Holders, to continue to provide liquidity to the market
because it may provide them with the opportunity to participate in a
larger portion of a trade in which a PMM or DPM has a participation
right (60% v. 50%). PMMs, and DPMs will still be entitled to a
significant participation right of 40% or 50%, as applicable, which
continues to provide an appropriate balance with their heightened
quoting obligations. The proposed rule change to provide a DPM's
participation right will be 30% if there are three or more Market-Maker
quotes or non-Public Customer orders at the BBO will further promote
other market participants to participate in a larger portion of a trade
and thus further encourage liquidity from these other market
participants, and is also consistent with the rules of another
exchange.\21\ This additional liquidity will ultimately benefit
investors. The proposed rule change that a PMM or DPM may receive the
amount it would otherwise receive pursuant to the applicable algorithm
if greater than the percentage specified in the rule will ensure PMMs
and DPMs are not harmed by the participation entitlements, which are
intended to be a benefit. This will encourage PMMs and DPMs to quote
larges sizes, which will benefit investors, and is consistent with the
rules of other exchanges.\22\ Similarly, the proposed rule change that
the PMM or DPM participation entitlement may not be fewer than one
contract when there are other Market-Maker quotes or non-Public
Customer orders ensures PMMs and DPMs will receive a benefit
[[Page 45200]]
in exchange for their heightened quoting obligations when executions
involve small number of contracts.
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\21\ See CBOE Rule 8.87(b)(2).
\22\ See CBOE Rules 6.45A(a)(i)(C) and 6.45B(a)(ii)(C); and MIAX
Rule 514(g)(1) and (h)(1).
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The proposed rule changes regarding the priority of contingency
orders, modified orders and quotes, and price improvement to incoming
orders and quotes eliminate potential confusion, promote just and
equitable principles of trade, and thus protect investors and the
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
C2 does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is
consistent with how the System currently executes and prioritizes
orders and quotes and primarily adds detail to the rules regarding
current System functionality. Thus, the System will allocate orders and
quotes under the proposed rule change in the same manner as it does
today. The proposed rule change applies in the same manner to the
orders and quotes of all Trading Permit Holders, and the additional
transparency in the rules benefits all investors. The proposed rule
change applies only to the allocation of orders and quotes in C2's
System.
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
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate,
it has become effective pursuant to Section 19(b)(3)(A) of the Act \23\
and Rule 19b-4(f)(6) \24\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\23\ 15 U.S.C. 78s(b)(3)(A).
\24\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-C2-2016-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-C2-2016-010. 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-C2-2016-010 and should be
submitted on or before August 2, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-16379 Filed 7-11-16; 8:45 am]
BILLING CODE 8011-01-P
