Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Order Approving a Proposed Rule Change Relating to Price Protection Mechanisms and Risk Controls, 92928-92932 [2016-30560]
Download as PDF
<![CDATA[
92928
Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79552; File No. SR–
BatsBZX–2016–61]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of
Designation of a Longer Period for
Commission Action on Proposed Rule
Change To Amend Exchange Rule
11.23, Auctions, To Enhance the
Reopening Auction Process Following
a Trading Halt Declared Pursuant to
the Plan To Address Extraordinary
Market Volatility Pursuant to Rule 608
of Regulation NMS
mstockstill on DSK3G9T082PROD with NOTICES
December 14, 2016.
On October 13, 2016, Bats BZX
Exchange, Inc. filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change
related to the reopening auction process
following a trading halt declared
pursuant to the Plan to Address
Extraordinary Market Volatility
Pursuant to Rule 608 of Regulation
NMS. The proposed rule change was
published for comment in the Federal
Register on November 1, 2016.3 The
Commission received no comments on
the proposed rule change.
Section 19(b)(2) of the Act 4 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is December 16,
2016. The Commission is extending this
45-day time period.
The Commission finds that it is
appropriate to designate a longer period
within which to take action on the
proposed rule change so that it has
sufficient time to consider the proposed
rule change. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,5 designates January
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79162
(October 26, 2016), 81 FR 75875.
4 15 U.S.C. 78s(b)(2).
5 Id.
2 17
VerDate Sep<11>2014
19:36 Dec 19, 2016
Jkt 241001
30, 2017 as the date by which the
Commission shall either approve or
disapprove or institute proceedings to
determine whether to disapprove the
proposed rule change (File Number SRBatsBZX–2016–61).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–30558 Filed 12–19–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79555; File No. SR–C2–
2016–020]
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Order Approving a Proposed Rule
Change Relating to Price Protection
Mechanisms and Risk Controls
December 14, 2016.
I. Introduction
On October 25, 2016, C2 Options
Exchange, Incorporated (‘‘C2’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend current and adopt new price
protection mechanisms and risk
controls for orders and quotes. The
Commission published the proposed
rule change for comment in the Federal
Register on November 3, 2016.3 The
Commission received no comments on
the proposal. This order approves the
proposed rule change.
II. Description of the Proposed Rule
Change 4
The Exchange currently has in place
various price check mechanisms and
risk controls that are designed to
prevent incoming orders and quotes
from automatically executing at
potentially erroneous prices or to assist
Trading Permit Holders (‘‘TPHs’’) with
managing their risk.5 The Exchange
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79189
(October 28, 2016), 81 FR 76671 (November 3, 2016)
(‘‘Notice’’).
4 A more detailed description of the proposed
rule change appears in the Notice. See id.
5 See, e.g., C2 Rules 6.13, Interpretation and
Policy .04 (price check parameters for complex
orders), 6.17(a) (market-width and drill through
price check parameters), Rule 6.17(b) (simple limit
1 15
PO 00000
Frm 00159
Fmt 4703
Sfmt 4703
proposed to amend C2 Rules 6.17 and
8.12 to add new, as well as amend
current, price protection mechanisms
and risk controls to further assist
brokers in their efforts to prevent errors
and avoid trading activity that could
potentially be unwanted or even
disruptive to the market.6
A. Limit Order Price Parameter for
Simple Orders
The Exchange proposed to amend the
limit order price parameter for simple
orders in C2 Rule 6.17(b). Currently, the
Exchange will not accept for execution
an eligible limit order if a limit order to
buy (sell) is more than an acceptable
tick distance (‘‘ATD’’) 7 above (below):
(i) The Exchange’s previous day’s
closing price prior to the opening of a
series, or (ii) the disseminated Exchange
offer (bid) once a series has opened.8
The Exchange has now proposed to
amend C2 Rule 6.17(b) to reject a limit
order to buy (sell) generally when it is
more than an ATD above (below) the
last disseminated national best offer
(‘‘NBO’’) (national best bid (‘‘NBB’’)).9
According to the Exchange, using the
NBBO or NBO (NBB), if available, will
more accurately reflect the then current
market, rather than the previous day’s
closing price or Exchange BBO.10 The
Exchange, however, will continue to use
the previous day’s closing price or
Exchange BBO in certain instances,
such as when the NBBO is locked or
crossed, or when there is no NBO (NBB)
and the closing price does not cross the
disseminated NBB (NBO).11
order price parameters), 6.17(d) and (e) (price
protections), and 8.12 (Quote Risk Monitor
Mechanism (‘‘QRM’’)).
6 The proposed rule change also made conforming
changes to C2 Rules 6.11, 6.14, and 6.18. A full
discussion of those changes may be found in the
Notice. See supra note 3.
7 Currently, the Exchange determines the ATD,
which may be no less than 5 minimum increment
ticks, on a series-by-series and premium basis.
Under the proposed rule change, the ATD, which
may be no less than two minimum increment ticks,
will be determined on a class-by-class and premium
basis. In addition, different ATDs may be applied
to orders entered during the pre-opening, a trading
rotation, or a trading halt. See proposed C2 Rule
6.17(b) and Notice, supra note 3, at 76673.
8 See C2 Rule 6.17(b).
9 Specifically, C2 will reject the order if it is more
than the ATD above (below): (i) Prior to the opening
of a series, (A) the last disseminated NBO (NBB),
if a series is open on another exchange, or (B) the
Exchange’s previous day’s closing price, if a series
is not yet open on any other exchange; if the NBBO
is locked, crossed, or unavailable; or if there is no
NBO (NBB) and the previous day’s closing price is
greater (less) than or equal to the NBB (NBO); (ii)
intraday, the last disseminated NBO (NBB), or the
Exchange’s best offer (bid) if the NBBO is locked,
crossed or unavailable; or (iii) during a trading halt,
the last disseminated NBO (NBB).
10 See Notice, supra note 3 at 76672.
11 See id.
E:\FR\FM\20DEN1.SGM
20DEN1
Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
C2 also proposed to apply the limit
order price parameter to immediate-orcancel orders. According to the
Exchange, such orders also are at risk of
execution at extreme and potentially
erroneous prices and thus will benefit
from applicability of these checks.12
However, the limit order price
parameter will not apply to orders with
a stop contingency.13 According to the
Exchange, buy orders with a stop
contingency are generally submitted at a
triggering price that is above the NBO,
and sell orders with a stop contingency
are generally submitted at a triggering
price that is below the NBB.14 As a
result, the Exchange believes these
orders are expected to be priced outside
the NBBO.15
B. Drill Through Price Check Parameter
The Exchange proposed to amend the
drill through price check parameter in
C2 Rule 6.17(a)(2). Currently, the
Exchange’s trading system (‘‘System’’)
will not automatically execute a market
or marketable limit order 16 if the
execution would follow an initial partial
execution on the Exchange at a price not
within an ATD 17 from the initial
execution. Instead, the System cancels
the remaining unexecuted portion.18
The Exchange now has proposed to
amend C2 Rule 6.17(a)(2) to add detail
to the rule describing how the System
will handle orders in the event that the
Exchange activates HAL or SAL.19 In
particular, orders not previously
exposed would be exposed via HAL and
orders previously exposed via HAL or
SAL would rest in the book for a period
of time and thereafter be cancelled if
they do not execute.20
12 See
id. at 76673.
proposed C2 Rule 6.17(b). A stop
contingency is triggered for a buy order if there is
a last sale or bid at or above the stop price and for
a sell order if there is a last sale or offer at or below
the stop price.
14 See Notice, supra note 3 at 76673.
15 See id.
16 Currently, the Exchange applies the marketwidth check to market orders and the drill through
check to market and marketable limit orders. The
Exchange proposed to codify this current practice
into the rules. See Notice, supra note 3, at 76673
n.12.
17 Currently, the ATD is determined by the
Exchange on a series-by-series and premium basis
for market orders and/or marketable limit orders
and may be no less than two minimum increment
ticks. Under the proposed rule change, the
Exchange will determine the ATD on a class and
premium basis (which may be no less than two
minimum increment ticks), which the Exchange
will announce via Regulatory Circular. See
proposed C2 Rule 6.17(a)(2)(A).
18 See C2 Rule 6.17(c).
19 Currently, the Exchange has not activated HAL
or SAL in any class. See Notice, supra note 3, at
76673 nn.13 and 15.
20 Specifically, if a buy (sell) order not yet
exposed via HAL partially executes, and the System
mstockstill on DSK3G9T082PROD with NOTICES
13 See
VerDate Sep<11>2014
19:36 Dec 19, 2016
Jkt 241001
Buy (sell) orders (or any unexecuted
portion) that are not eligible for HAL or
SAL and do not otherwise cancel by
their terms will continue to be cancelled
pursuant to proposed C2 Rule
6.17(a)(2)(D). In addition, the drill
through price check parameter at the
open will be handled pursuant to the
separate process set forth in Rule
6.11(g)(2) and Interpretation and Policy
.04.21
C. TPH-Designated Risk Settings
The Exchange proposed to amend C2
Rule 6.17 to authorize it to share TPHdesignated risk settings with a TPH’s
Clearing TPH. The risk settings that the
Exchange may share with Clearing TPHs
include, but are not limited to, settings
under Rule 8.12 (related to QRM) and
proposed C2 Rule 6.17(g) (related to
order entry and execution rate checks)
and (h) (related to maximum contract
size). The Exchange represented that
other options exchanges have similar
rules permitting them to share memberdesignated risk settings with other
members that clear transactions on the
member’s behalf.22
determines the unexecuted portion would execute
at a price higher (lower) than the price that is an
ATD above (below) the NBO (NBB) (‘‘drill through
price’’), the System will not automatically execute
the remaining portion but will instead expose it via
HAL at the better of the NBBO and the drill through
price (if eligible for HAL). If a buy (sell) order
exposed via HAL (other than pursuant to the
previous sentence) or the Solicitation Auction
Mechanism (‘‘SAL’’) would, following the exposure
period, execute at a price higher (lower) than the
drill through price, the System will not
automatically execute the order (or unexecuted
portion). These orders (or unexecuted portions) will
rest in the book (based on the time at which they
enter the book for priority purposes) for a time
period in milliseconds with a price equal to the
drill through price. The Exchange will determine
the time period (not to exceed three seconds) and
announce it via Regulatory Circular in the event the
Exchange activates HAL or SAL. See Notice, supra
note 3, at 76674. If the order (or any unexecuted
portion) does not execute during that time period,
the System cancels it. In classes in which the
Exchange activated SAL, an order eligible for SAL
would be exposed immediately and would not
partially execute prior to being exposed via SAL.
For this reason, SAL is not included in proposed
C2 Rule 6.17(a)(2)(A). See Notice, supra note 3, at
76673 n. 15. Any order (or unexecuted portion) that
by its terms cancels if it does not execute
immediately (including immediate-or-cancel, fillor-kill, intermarket sweep, and market-maker trade
prevention orders) will be cancelled rather than rest
in the book for this time period in accordance with
the definition of those order types. See proposed C2
Rule 6.17(a)(2)(C).
21 The proposed rule change also amended the
market width price check parameter in C2 Rule
6.17(a)(1) to be determined on a class-by-class basis
rather than series-by-series, as well as made
additional non-substantive changes to Rule
6.17(a)(1), such as moving provisions regarding the
market-width price check parameter from current
paragraph (c) to proposed subparagraph (a)(1).
22 See Notice, supra note 3 at 76675. See also,
e.g., Miami International Securities Exchange, LLC
(‘‘MIAX’’) Rule 500; NASDAQ OMX BX, Inc. (‘‘BX’’)
PO 00000
Frm 00160
Fmt 4703
Sfmt 4703
92929
D. Put Strike Price/Call Underlying
Value Checks
The Exchange proposed to amend the
put strike price and call underlying
value checks in C2 Rule 6.17(d).
Currently, the System rejects back to the
TPH a quote or buy limit order for (i) a
put if the price of the quote bid or order
is greater than or equal to the strike
price of the option, or (ii) a call if the
price of the quote bid or order is greater
than or equal to the consolidated last
sale price of the underlying security,
with respect to equity and exchangetraded fund options, or the last
disseminated value of the underlying
index, with respect to index options.
The Exchange proposed to extend this
check to apply to market orders (and
any remaining size after a partial
execution).23
E. Quote Inverting NBBO Check
The Exchange proposed to amend C2
Rule 6.17(e) regarding the quote
inverting NBBO check. Currently, if the
Exchange is at the NBO (NBB), the
System rejects a quote back to a MarketMaker if the quote bid (offer) crosses the
NBO (NBB) by more than a number of
ticks specified by the Exchange. If C2 is
not at the NBO (NBB), the System
rejects a quote back to a Market-Maker
if the quote bid (offer) locks or crosses
the NBO (NBB). If the NBBO is
unavailable, locked, or crossed, then
this check compares the quote to the
BBO (if available). The rule is currently
silent on what happens if the BBO is
unavailable.
The Exchange has now proposed to
amend Rule 6.17(e) to not apply this
check to incoming quotes when the BBO
is unavailable. The Exchange also
proposed to amend the rule to state that
it will not apply the check to incoming
quotes prior to the opening of a series
if the series is not open on another
exchange, as well as during a trading
halt.24
F. Execution of Quotes that Lock or
Cross NBBO
The Exchange further proposed to
amend the provision concerning the
execution of quotes that lock or cross
Chapter VI, Section 20; NYSE Arca, Inc. (‘‘Arca’’)
Rule 6.2A(a); NYSE MKT LLC (‘‘MKT’’) Rule
902.1NY(a); and NASDAQ OMX PHLX LLC
(‘‘PHLX’’) Rule 1016.
23 The Exchange will not apply these checks to
market orders that execute during the opening
process, however, in order to avoid impacting the
determination of the opening price. According to
the Exchange, separate price protections apply
during the opening process, including the drill
through protection in C2 Rule 6.11. See Notice,
supra note 3, at 76675.
24 See proposed C2 Rule 6.17(e)(2) and (3).
E:\FR\FM\20DEN1.SGM
20DEN1
92930
Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
the NBBO.25 The rule currently states
that if the System accepts a quote that
locks or crosses the NBBO, it executes
the quote and either (i) cancels any
remainder or (ii) books any remainder if
the price of the quote does not lock or
cross the price of an away exchange.
The Exchange has now proposed to
amend the rule to not apply the check
when the NBBO is locked, crossed, or
unavailable.26 In addition, the Exchange
proposed to authorize a senior official at
the Exchange’s Help Desk to determine
not to apply this check in the interest of
maintaining a fair and orderly market.
For example, the Exchange believes it is
appropriate to disable this check in
response to a market event or market
volatility to avoid inadvertently
cancelling quotes not erroneously
priced but rather priced to reflect
potentially rapidly changing prices.27
G. Order Entry, Execution, and Price
Parameter Checks
mstockstill on DSK3G9T082PROD with NOTICES
The Exchange proposed to adopt the
following four mandatory activity-based
risk protections under proposed C2 Rule
6.17(g): 28
(i) the total number of orders (of all
order types) and auction responses
entered and accepted by the System
(‘‘orders entered’’);
(ii) the total number of contracts (from
orders and auction responses) executed
on the System, which does not count
stock contracts executed as part of
stock-option orders (‘‘contracts
executed’’);
(iii) the total number of orders the
System books or cancels 29 pursuant to
the drill through price check parameter
(as amended by this proposed rule
change) in proposed Rule 6.17(a)(2)
(‘‘drill through events’’); and
(iv) the total number of orders the
System cancels pursuant to the limit
25 The Exchange proposed to move this provision
from current C2 Rule 6.17(e)(iii) to proposed C2
Rule 6.17(f).
26 See Notice, supra note 3, at 76676.
27 See id. The Exchange represented that,
pursuant to Exchange procedures, any decision to
not apply the check and the reason for such
decision will be documented, retained, and
periodically reviewed. See id.
28 Other exchanges maintain similar activitybased risk protections. See, e.g., International
Securities Exchange, LLC (‘‘ISE’’) Rule 714(d) and
MIAX Rule 519A.
29 As discussed above, orders (or unexecuted
portions) that by their terms cancel if they do not
execute immediately will be cancelled rather than
rest in the book for a period of time (as proposed
in this filing) pursuant to the drill through price
check parameter if triggered. According to the
Exchange, because these orders will not book or be
cancelled pursuant to the drill through price check
parameter (but rather because of their terms), these
orders will not be included in the count for the drill
through event check. See Notice, supra note 3, at
76676 n.32.
VerDate Sep<11>2014
19:36 Dec 19, 2016
Jkt 241001
order price parameters in Rules 6.13,
Interpretation and Policy .04(f) and (g),
and 6.17(b) (‘‘price reasonability
events’’).
When a TPH exceeds a parameter
within one of the time intervals set by
C2, the System will (i) reject all
subsequent incoming orders and quotes,
(ii) cancel all resting quotes, and (iii) for
the orders entered and contracts
executed checks, if the TPH requests,
cancel resting orders in the manner
specified by the TPH (either all orders,
orders with time-in-force of day, or
orders entered on that trading day).30
The System will not accept new
orders or quotes from a restricted
acronym or login until the Exchange
receives the TPH’s manual notification
to reactivate its ability to send orders
and quotes. While an acronym or login
is restricted, a TPH may continue to
interact with any resting orders (i.e.,
orders not cancelled pursuant to this
protection) entered prior to its acronym
or login becoming restricted, including
receiving trade execution reports and
canceling resting orders.
H. Maximum Contract Size
The Exchange proposed to adopt a
maximum contact size risk control
pursuant to which the System will reject
a TPH’s incoming order or quote
(including both sides of a two-sided
quote) if its size exceeds the TPH’s
designated maximum contract size
parameter.31 Each TPH must provide a
maximum contract size for each of
simple orders, complex orders, and
quotes applicable to an acronym or, if
the TPH requests, a login.32
30 The Exchange expects the initial time intervals
for all these checks to be set at one and five
minutes. The time intervals set by the Exchange
will apply to all TPHs, who will not be able to
change these time intervals. See Notice, supra note
3, at 76676 n.33.
31 See proposed C2 Rule 6.17(h). The Exchange
represented that other options exchanges have
adopted similar functionality. See Notice, supra
note 3, at 76678 n.40; MIAX Rule 519(b).
32 For purposes of determining the contract size
of an incoming order or quote, the proposed rule
states the contract size of a complex order will
equal the contract size of the largest option leg of
the order (i.e., if the order is a stock-option order,
this check will not apply to the stock leg of the
order). See proposed C2 Rule 6.17(h). If a TPH
enters an order or quote to replace a resting order
or update a resting quote, and the System rejects the
incoming order or quote because it exceeds the
applicable maximum contract size, the System also
will cancel the resting order or any resting quote in
the same series. In addition, the Exchange proposed
to apply this check to paired orders submitted to
AIM or SAM. Further, the Exchange proposed that
for an A:AIR order, if the System rejects the agency
order, then the System rejects the contra-side order;
however, if the System rejects the contra-side order,
the System still accepts the agency order. See
proposed C2 Rule 6.17(h)(2).
PO 00000
Frm 00161
Fmt 4703
Sfmt 4703
I. Kill Switch
The Exchange further proposed to
adopt a kill switch, which will be on
optional tool allowing a TPH to send a
message to the System to, or contact the
Exchange Help Desk to request that, the
Exchange cancel all its resting quotes,
resting orders (either all orders, orders
with time-in-force of day, or orders
entered on that trading day), or both,
and thereafter reject all subsequent
incoming quotes and/or orders.33 The
System will send a TPH an automated
message when it has processed a kill
switch request and thereafter will not
accept new orders or quotes from a
restricted acronym or login until the
Exchange receives the TPH’s manual
notification to reactivate its ability to
send orders and quotes.
According to the Exchange, the kill
switch message will be accepted by the
System in the order of receipt in the
queue and will be processed in that
order so that interest already in the
System will be processed prior to the
kill switch message.34 Moreover, a
Market-Maker’s utilization of the kill
switch, and subsequent removal of its
quotes, will not diminish or relieve the
Market-Maker of its obligation to
provide continuous two-sided quotes.
Market-Makers will continue to be
required to provide continuous twosided quotes on a daily basis, and a
Market-Maker’s utilization of the kill
switch will not prohibit the Exchange
from taking disciplinary action against
the Market-Maker for failing to meet the
continuing quoting obligation each
trading day.35
J. Quote Risk Monitor Mechanism
Lastly, the Exchange proposed to
amend the QRM Mechanism in C2 Rule
8.12. Pursuant to the QRM mechanism,
a Market-Maker may establish a (i)
maximum number of contracts, (ii) a
maximum cumulative percentage of the
original quoted size of each side of each
series, and (iii) the maximum number of
series for which either side of its quote
is fully traded, that may trade within a
rolling time period in milliseconds also
established by the Market-Maker. When
these parameters are exceeded within
the time interval, the System cancels the
Market-Maker’s quotes in the class and
other classes with the same underlying.
In addition, C2 Rule 8.12 allows MarketMakers or TPH organizations to specify
33 See proposed C2 Rule 6.17(i). The Exchange
represented that other options exchanges have
adopted similar kill switches. See Notice, supra
note 3, at 76678; BOX Options Exchange LLC
(‘‘BOX’’) Rule 7280 and PHLX Rule 1019(b).
34 See Notice, supra note 3 at 76681.
35 See id.
E:\FR\FM\20DEN1.SGM
20DEN1
Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6 of the Act 37 and the rules and
regulations thereunder applicable to the
Exchange.38 Specifically, the
Commission finds that the proposed
rule change is consistent with the
Section 6(b)(5) 39 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. The
Commission believes that the proposed
rule change is designed to mitigate the
likelihood of orders trading at
potentially erroneous prices, clarify
when certain price/risk controls will
apply, and assist TPHs in managing
their risk exposure to avoid potentially
harmful and disruptive trading.
Moreover, the Commission notes that it
recently approved proposed rule
changes to CBOE rules that are
substantially similar to the C2 proposed
rule changes that are the subject of this
Order.40
As discussed above, C2 is proposing
to amend its limit order price parameter
for simple orders to use the NBBO when
available in lieu of the Exchange’s
previous day’s closing price or BBO. To
the extent that the use of the NBBO,
when available, rather than the
Exchange’s previous day’s closing price
or BBO, may better reflect the then
current market, it should provide a
suitable measure for purposes of
determining the reasonability of the
prices of orders. Moreover, the
Commission believes that it is
reasonable for C2 to exclude orders with
a stop contingency from the limit order
price check parameter, as application of
the limit order price check parameter to
such orders may interfere with the
application of the stop contingency.
Further, the Commission believes that
the proposed rule change to expand the
applicability of the put strike price and
call underlying value checks to market
orders 41 may help TPHs mitigate risks
associated with orders trading at prices
that exceed a corresponding benchmark,
which may indicate an execution at a
price that is potentially erroneous.
The proposed changes to the drill
through price checks provide additional
detail to the rule regarding how the
System will handle certain orders in the
event that the Exchange activates HAL
or SAL, such as orders that were not
exposed prior to trading up to the drill
through price and orders that traded up
to the drill through price following
exposure. In addition, allowing the
remainder of orders to rest in the book
for a brief time period at the drill
through price may benefit investors by
providing an additional opportunity for
execution of their orders. Furthermore,
clarifying that an order exposed via
HAL pursuant to the drill through price
check will not be exposed at a price
worse than the NBBO is consistent with
the current treatment of other orders
exposed via HAL at the NBBO.42
The Commission also believes that the
proposed amendments to the quote
inverting NBBO check will provide
market participants with greater clarity
that C2 will not apply the check in the
absence of an NBBO or BBO. In
addition, the proposed rule change
36 The Exchange represented that other options
exchanges have made similar functionality
mandatory for all Market-Makers. See Notice, supra
note 3, at 76679; ISE Rule 804(g).
37 15 U.S.C. 78f(b).
38 In approving these proposed rule changes, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
39 15 U.S.C. 78f(b)(5).
40 See Securities Exchange Act Release No. 79244
(November 4, 2016), 81 FR 79063 (November 10,
2016) (approving CBOE proposed rule changes
relating to price protection mechanisms and risk
controls).
41 The checks will not apply to market orders
during an opening rotation since separate price
protections will apply during the opening process.
See Notice, supra note 3, at 76680.
42 See current and proposed C2 Rule 6.18(b).
mstockstill on DSK3G9T082PROD with NOTICES
a maximum number of QRM incidents
across all classes on an Exchange-wide
basis. When the Exchange determines
that a Market-Maker or TPH
organization has reached its QRM
incident limit during the rolling time
interval, the System will cancel all of
the Market-Maker’s electronic quotes
and Market-Maker orders resting in the
book in all option classes on the
Exchange and prevent the Market-Maker
or TPH organization from sending
additional quotes or orders to the
Exchange until the Market-Maker
reactivates its ability to send quotes or
orders.
Currently, use of the QRM is optional.
The Exchange proposed to amend C2
Rule 8.12 to make it mandatory for
Market-Makers to enter values for each
parameter for all classes in which they
quote.36
VerDate Sep<11>2014
19:36 Dec 19, 2016
Jkt 241001
PO 00000
Frm 00162
Fmt 4703
Sfmt 4703
92931
eliminates the Exchange’s flexibility to
apply the check prior to the opening of
a series as well as during a trading halt.
Removing this flexibility and clearly
stating when C2 will not apply the
check considerably enhances the
transparency of the functionality.
With respect to C2’s proposed
changes regarding the execution of
quotes that lock or cross the NBBO
(Proposed Rule 6.17(f)), the Commission
believes that the proposed rule change
to not apply the check when the NBBO
is locked, crossed or unavailable, and to
allow the Exchange to disable this check
in the interest of maintaining a fair and
orderly market, will prevent the System
from cancelling quotes when there is no
reliable benchmark or when prices on
quotes may not be erroneous but rather
reflect a rapidly changing market.
Moreover, to the extent the Exchange
determines to temporarily deactivate the
check in the interest of maintaining a
fair and orderly market, C2 has
represented that all such decisions by
C2 will be adequately justified,
documented, retained, and periodically
reviewed.43
Further, the Commission believes that
the Exchange’s proposed risk protection
parameters and mechanisms for orders
and quotes are reasonably designed to
provide TPHs with additional tools to
assist them in managing their risk
exposure. Specifically, the order entry,
execution, and price parameter rate
checks, maximum contract size risk
control, and mandatory use of the QRM
may help TPHs to mitigate the potential
risks associated with entering too many
orders or quotes, executing too many
contracts, having too many orders
cancelled because of price protection
parameters, and entering orders or
quotes with size that may be potentially
erroneous that may result from, for
example, technology issues with the
broker’s electronic trading system. To
this extent, these TPH-customizable
settings may help act as a backstop to
the TPH’s own controls and provide an
additional layer of protection
customized to the TPH’s self-selected
parameters. In addition to the CBOE
filing mentioned above, the Commission
notes that other exchanges have
established similar risk protection
mechanisms.44 The Commission notes
that the proposed functionality,
including the cancellation of any resting
interest, must be processed in sequence
with other interest in the System and
43 See
supra note 27 and accompanying text.
ISE Rules 714(d) & 804(g); MIAX Rules
519(b) & 519A.
44 See
E:\FR\FM\20DEN1.SGM
20DEN1
mstockstill on DSK3G9T082PROD with NOTICES
92932
Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
comply with the firm quote obligations
in Rule 602 of Regulation NMS.
C2 will require TPHs and MarketMakers to utilize these risk protection
parameters and mechanisms. However,
TPHs and Market-Makers will have
discretion to customize the parameters
in accordance with their respective risk
management needs. In light of this
flexibility, the Commission reminds
TPHs to be mindful of their obligations,
to among others, seek best execution of
orders they handle on an agency basis
and consider their best execution
obligations when establishing
parameters for the order entry,
execution, price parameter rate checks,
maximum contract size risk control, and
QRM.45 For example, an abnormally
low order entry parameter should be
carefully scrutinized, particularly if a
TPH’s order flow to the Exchange
contains agency orders. To the extent
that a TPH chooses sensitive parameters
and those parameters apply to
connections over which it transmits
customer orders to the Exchange, a TPH
should consider the effect of its chosen
settings on its ability to receive a timely
execution on marketable agency orders
that it sends to the Exchange in various
market conditions. The Commission
cautions brokers considering their best
execution obligations to be aware that
an agency order they represent may be
rejected as a result of these risk
protections.
In addition, in light of the Exchange’s
decision not to set maximum or
minimum values, or default values, the
Commission expects C2 to periodically
assess whether these risk protection
measures are operating in a manner that
is consistent with the promotion of fair
and orderly markets, including whether
not utilizing maximum and minimum
parameters or default values continues
to be appropriate and in accordance
with the Act and the rules thereunder.
Further, the Commission believes that
Proposed Rule 6.17(i), which creates an
optional kill switch mechanism, is
consistent with the Act as it may further
enhance risk management capabilities of
TPHs by providing them with the ability
to manage their risk exposure if they
experience a significant system failure.
To the extent that the kill switch
mechanism provides TPHs with an
appropriate backstop in this manner, it
may encourage firms to provide
liquidity on C2 and thus contribute to
fair and orderly markets in a manner
45 See, e.g., Securities Exchange Act Release Nos.
37619A (September 6, 1996), 61 FR 48290
(September 12, 1996) (Order Handling Rules
adopting release); 51808 (June 9, 2005), 70 FR
37496, 37537–8 (June 29, 2005) (Regulation NMS
adopting release).
VerDate Sep<11>2014
19:36 Dec 19, 2016
Jkt 241001
that protects investors and the public
interest. The Commission notes that the
Exchange represented in its proposal
that the kill switch will operate
consistently with a broker-dealer’s firm
quote obligations pursuant to Rule 602
of Regulation NMS,46 and that the kill
switch does not diminish or relieve a
Market-Maker of its obligation to
provide continuous two-sided quotes.47
The Exchange also represented that the
kill switch message will be accepted by
the System in the order of receipt in the
queue and will be processed in such
order. As such, the System will process
interest already in the System prior to
receipt of the kill switch message prior
to processing the kill switch message.48
Based on these representations, the
Commission believes that the kill switch
is reasonably designed to promote just
and equitable principles of trade and
perfect the mechanism of a free and
open market. Lastly, the Commission
notes that in addition to the CBOE filing
mentioned above, other exchanges have
established kill switches that operate in
a manner similar to that proposed by
C2.49
Finally, the Commission believes that
the proposal to authorize C2 to share
with Clearing TPHs the risk mitigation
settings selected by a TPH for whom the
Clearing TPH clears may assist Clearing
TPHs manage their clearing risk
exposure. In addition to the CBOE filing
mentioned above, the Commission notes
that other exchanges have adopted
similar rules authorizing the sharing of
similar risk settings with clearing
members.50
IV. Conclusion
It Is therefore ordered, pursuant to
Section 19(b)(2) of the Act,51 that the
proposed rule change (SR–C2–2016–
020), be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–30560 Filed 12–19–16; 8:45 am]
BILLING CODE 8011–01–P
46 See
Notice, supra note 3, at 76681.
id.
48 See id.
49 See, e.g., BOX Rule 7280(b) and PHLX Rule
1019(b).
50 See, e.g., MIAX Rule 500; BX Chapter VI,
Section 20; NYSE Arca Rule 6.2A(a); NYSE MKT
Rule 902.1NY(a); and PHLX Rule 1016.
51 See id.
52 17 CFR 200.30–3(a)(12).
47 See
PO 00000
Frm 00163
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79546; File No. SR–
NASDAQ–2016–165]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
4770 (Compliance With Regulation
NMS Plan To Implement a Tick Size
Pilot)
December 14, 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 November
30, 2016, The NASDAQ Stock Market
LLC (‘‘Nasdaq’’ 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 amend
Nasdaq Rule 4770 to modify the Web
site data publication requirements
relating to the Regulation NMS Plan to
Implement a Tick Size Pilot Program
(‘‘Plan’’) and to clarify the timing and
format of publishing Market Maker
registration statistics.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, 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.
1 15
2 17
E:\FR\FM\20DEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
20DEN1
]]>Agencies
[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)]
[Notices]
[Pages 92928-92932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30560]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79555; File No. SR-C2-2016-020]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Order Approving a Proposed Rule Change Relating to Price Protection
Mechanisms and Risk Controls
December 14, 2016.
I. Introduction
On October 25, 2016, C2 Options Exchange, Incorporated (``C2'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend current and adopt new price protection
mechanisms and risk controls for orders and quotes. The Commission
published the proposed rule change for comment in the Federal Register
on November 3, 2016.\3\ The Commission received no comments on the
proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 79189 (October 28,
2016), 81 FR 76671 (November 3, 2016) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change \4\
---------------------------------------------------------------------------
\4\ A more detailed description of the proposed rule change
appears in the Notice. See id.
---------------------------------------------------------------------------
The Exchange currently has in place various price check mechanisms
and risk controls that are designed to prevent incoming orders and
quotes from automatically executing at potentially erroneous prices or
to assist Trading Permit Holders (``TPHs'') with managing their
risk.\5\ The Exchange proposed to amend C2 Rules 6.17 and 8.12 to add
new, as well as amend current, price protection mechanisms and risk
controls to further assist brokers in their efforts to prevent errors
and avoid trading activity that could potentially be unwanted or even
disruptive to the market.\6\
---------------------------------------------------------------------------
\5\ See, e.g., C2 Rules 6.13, Interpretation and Policy .04
(price check parameters for complex orders), 6.17(a) (market-width
and drill through price check parameters), Rule 6.17(b) (simple
limit order price parameters), 6.17(d) and (e) (price protections),
and 8.12 (Quote Risk Monitor Mechanism (``QRM'')).
\6\ The proposed rule change also made conforming changes to C2
Rules 6.11, 6.14, and 6.18. A full discussion of those changes may
be found in the Notice. See supra note 3.
---------------------------------------------------------------------------
A. Limit Order Price Parameter for Simple Orders
The Exchange proposed to amend the limit order price parameter for
simple orders in C2 Rule 6.17(b). Currently, the Exchange will not
accept for execution an eligible limit order if a limit order to buy
(sell) is more than an acceptable tick distance (``ATD'') \7\ above
(below): (i) The Exchange's previous day's closing price prior to the
opening of a series, or (ii) the disseminated Exchange offer (bid) once
a series has opened.\8\
---------------------------------------------------------------------------
\7\ Currently, the Exchange determines the ATD, which may be no
less than 5 minimum increment ticks, on a series-by-series and
premium basis. Under the proposed rule change, the ATD, which may be
no less than two minimum increment ticks, will be determined on a
class-by-class and premium basis. In addition, different ATDs may be
applied to orders entered during the pre-opening, a trading
rotation, or a trading halt. See proposed C2 Rule 6.17(b) and
Notice, supra note 3, at 76673.
\8\ See C2 Rule 6.17(b).
---------------------------------------------------------------------------
The Exchange has now proposed to amend C2 Rule 6.17(b) to reject a
limit order to buy (sell) generally when it is more than an ATD above
(below) the last disseminated national best offer (``NBO'') (national
best bid (``NBB'')).\9\ According to the Exchange, using the NBBO or
NBO (NBB), if available, will more accurately reflect the then current
market, rather than the previous day's closing price or Exchange
BBO.\10\ The Exchange, however, will continue to use the previous day's
closing price or Exchange BBO in certain instances, such as when the
NBBO is locked or crossed, or when there is no NBO (NBB) and the
closing price does not cross the disseminated NBB (NBO).\11\
---------------------------------------------------------------------------
\9\ Specifically, C2 will reject the order if it is more than
the ATD above (below): (i) Prior to the opening of a series, (A) the
last disseminated NBO (NBB), if a series is open on another
exchange, or (B) the Exchange's previous day's closing price, if a
series is not yet open on any other exchange; if the NBBO is locked,
crossed, or unavailable; or if there is no NBO (NBB) and the
previous day's closing price is greater (less) than or equal to the
NBB (NBO); (ii) intraday, the last disseminated NBO (NBB), or the
Exchange's best offer (bid) if the NBBO is locked, crossed or
unavailable; or (iii) during a trading halt, the last disseminated
NBO (NBB).
\10\ See Notice, supra note 3 at 76672.
\11\ See id.
---------------------------------------------------------------------------
[[Page 92929]]
C2 also proposed to apply the limit order price parameter to
immediate-or-cancel orders. According to the Exchange, such orders also
are at risk of execution at extreme and potentially erroneous prices
and thus will benefit from applicability of these checks.\12\ However,
the limit order price parameter will not apply to orders with a stop
contingency.\13\ According to the Exchange, buy orders with a stop
contingency are generally submitted at a triggering price that is above
the NBO, and sell orders with a stop contingency are generally
submitted at a triggering price that is below the NBB.\14\ As a result,
the Exchange believes these orders are expected to be priced outside
the NBBO.\15\
---------------------------------------------------------------------------
\12\ See id. at 76673.
\13\ See proposed C2 Rule 6.17(b). A stop contingency is
triggered for a buy order if there is a last sale or bid at or above
the stop price and for a sell order if there is a last sale or offer
at or below the stop price.
\14\ See Notice, supra note 3 at 76673.
\15\ See id.
---------------------------------------------------------------------------
B. Drill Through Price Check Parameter
The Exchange proposed to amend the drill through price check
parameter in C2 Rule 6.17(a)(2). Currently, the Exchange's trading
system (``System'') will not automatically execute a market or
marketable limit order \16\ if the execution would follow an initial
partial execution on the Exchange at a price not within an ATD \17\
from the initial execution. Instead, the System cancels the remaining
unexecuted portion.\18\
---------------------------------------------------------------------------
\16\ Currently, the Exchange applies the market-width check to
market orders and the drill through check to market and marketable
limit orders. The Exchange proposed to codify this current practice
into the rules. See Notice, supra note 3, at 76673 n.12.
\17\ Currently, the ATD is determined by the Exchange on a
series-by-series and premium basis for market orders and/or
marketable limit orders and may be no less than two minimum
increment ticks. Under the proposed rule change, the Exchange will
determine the ATD on a class and premium basis (which may be no less
than two minimum increment ticks), which the Exchange will announce
via Regulatory Circular. See proposed C2 Rule 6.17(a)(2)(A).
\18\ See C2 Rule 6.17(c).
---------------------------------------------------------------------------
The Exchange now has proposed to amend C2 Rule 6.17(a)(2) to add
detail to the rule describing how the System will handle orders in the
event that the Exchange activates HAL or SAL.\19\ In particular, orders
not previously exposed would be exposed via HAL and orders previously
exposed via HAL or SAL would rest in the book for a period of time and
thereafter be cancelled if they do not execute.\20\
---------------------------------------------------------------------------
\19\ Currently, the Exchange has not activated HAL or SAL in any
class. See Notice, supra note 3, at 76673 nn.13 and 15.
\20\ Specifically, if a buy (sell) order not yet exposed via HAL
partially executes, and the System determines the unexecuted portion
would execute at a price higher (lower) than the price that is an
ATD above (below) the NBO (NBB) (``drill through price''), the
System will not automatically execute the remaining portion but will
instead expose it via HAL at the better of the NBBO and the drill
through price (if eligible for HAL). If a buy (sell) order exposed
via HAL (other than pursuant to the previous sentence) or the
Solicitation Auction Mechanism (``SAL'') would, following the
exposure period, execute at a price higher (lower) than the drill
through price, the System will not automatically execute the order
(or unexecuted portion). These orders (or unexecuted portions) will
rest in the book (based on the time at which they enter the book for
priority purposes) for a time period in milliseconds with a price
equal to the drill through price. The Exchange will determine the
time period (not to exceed three seconds) and announce it via
Regulatory Circular in the event the Exchange activates HAL or SAL.
See Notice, supra note 3, at 76674. If the order (or any unexecuted
portion) does not execute during that time period, the System
cancels it. In classes in which the Exchange activated SAL, an order
eligible for SAL would be exposed immediately and would not
partially execute prior to being exposed via SAL. For this reason,
SAL is not included in proposed C2 Rule 6.17(a)(2)(A). See Notice,
supra note 3, at 76673 n. 15. Any order (or unexecuted portion) that
by its terms cancels if it does not execute immediately (including
immediate-or-cancel, fill-or-kill, intermarket sweep, and market-
maker trade prevention orders) will be cancelled rather than rest in
the book for this time period in accordance with the definition of
those order types. See proposed C2 Rule 6.17(a)(2)(C).
---------------------------------------------------------------------------
Buy (sell) orders (or any unexecuted portion) that are not eligible
for HAL or SAL and do not otherwise cancel by their terms will continue
to be cancelled pursuant to proposed C2 Rule 6.17(a)(2)(D). In
addition, the drill through price check parameter at the open will be
handled pursuant to the separate process set forth in Rule 6.11(g)(2)
and Interpretation and Policy .04.\21\
---------------------------------------------------------------------------
\21\ The proposed rule change also amended the market width
price check parameter in C2 Rule 6.17(a)(1) to be determined on a
class-by-class basis rather than series-by-series, as well as made
additional non-substantive changes to Rule 6.17(a)(1), such as
moving provisions regarding the market-width price check parameter
from current paragraph (c) to proposed subparagraph (a)(1).
---------------------------------------------------------------------------
C. TPH-Designated Risk Settings
The Exchange proposed to amend C2 Rule 6.17 to authorize it to
share TPH-designated risk settings with a TPH's Clearing TPH. The risk
settings that the Exchange may share with Clearing TPHs include, but
are not limited to, settings under Rule 8.12 (related to QRM) and
proposed C2 Rule 6.17(g) (related to order entry and execution rate
checks) and (h) (related to maximum contract size). The Exchange
represented that other options exchanges have similar rules permitting
them to share member-designated risk settings with other members that
clear transactions on the member's behalf.\22\
---------------------------------------------------------------------------
\22\ See Notice, supra note 3 at 76675. See also, e.g., Miami
International Securities Exchange, LLC (``MIAX'') Rule 500; NASDAQ
OMX BX, Inc. (``BX'') Chapter VI, Section 20; NYSE Arca, Inc.
(``Arca'') Rule 6.2A(a); NYSE MKT LLC (``MKT'') Rule 902.1NY(a); and
NASDAQ OMX PHLX LLC (``PHLX'') Rule 1016.
---------------------------------------------------------------------------
D. Put Strike Price/Call Underlying Value Checks
The Exchange proposed to amend the put strike price and call
underlying value checks in C2 Rule 6.17(d). Currently, the System
rejects back to the TPH a quote or buy limit order for (i) a put if the
price of the quote bid or order is greater than or equal to the strike
price of the option, or (ii) a call if the price of the quote bid or
order is greater than or equal to the consolidated last sale price of
the underlying security, with respect to equity and exchange-traded
fund options, or the last disseminated value of the underlying index,
with respect to index options. The Exchange proposed to extend this
check to apply to market orders (and any remaining size after a partial
execution).\23\
---------------------------------------------------------------------------
\23\ The Exchange will not apply these checks to market orders
that execute during the opening process, however, in order to avoid
impacting the determination of the opening price. According to the
Exchange, separate price protections apply during the opening
process, including the drill through protection in C2 Rule 6.11. See
Notice, supra note 3, at 76675.
---------------------------------------------------------------------------
E. Quote Inverting NBBO Check
The Exchange proposed to amend C2 Rule 6.17(e) regarding the quote
inverting NBBO check. Currently, if the Exchange is at the NBO (NBB),
the System rejects a quote back to a Market-Maker if the quote bid
(offer) crosses the NBO (NBB) by more than a number of ticks specified
by the Exchange. If C2 is not at the NBO (NBB), the System rejects a
quote back to a Market-Maker if the quote bid (offer) locks or crosses
the NBO (NBB). If the NBBO is unavailable, locked, or crossed, then
this check compares the quote to the BBO (if available). The rule is
currently silent on what happens if the BBO is unavailable.
The Exchange has now proposed to amend Rule 6.17(e) to not apply
this check to incoming quotes when the BBO is unavailable. The Exchange
also proposed to amend the rule to state that it will not apply the
check to incoming quotes prior to the opening of a series if the series
is not open on another exchange, as well as during a trading halt.\24\
---------------------------------------------------------------------------
\24\ See proposed C2 Rule 6.17(e)(2) and (3).
---------------------------------------------------------------------------
F. Execution of Quotes that Lock or Cross NBBO
The Exchange further proposed to amend the provision concerning the
execution of quotes that lock or cross
[[Page 92930]]
the NBBO.\25\ The rule currently states that if the System accepts a
quote that locks or crosses the NBBO, it executes the quote and either
(i) cancels any remainder or (ii) books any remainder if the price of
the quote does not lock or cross the price of an away exchange.
---------------------------------------------------------------------------
\25\ The Exchange proposed to move this provision from current
C2 Rule 6.17(e)(iii) to proposed C2 Rule 6.17(f).
---------------------------------------------------------------------------
The Exchange has now proposed to amend the rule to not apply the
check when the NBBO is locked, crossed, or unavailable.\26\ In
addition, the Exchange proposed to authorize a senior official at the
Exchange's Help Desk to determine not to apply this check in the
interest of maintaining a fair and orderly market. For example, the
Exchange believes it is appropriate to disable this check in response
to a market event or market volatility to avoid inadvertently
cancelling quotes not erroneously priced but rather priced to reflect
potentially rapidly changing prices.\27\
---------------------------------------------------------------------------
\26\ See Notice, supra note 3, at 76676.
\27\ See id. The Exchange represented that, pursuant to Exchange
procedures, any decision to not apply the check and the reason for
such decision will be documented, retained, and periodically
reviewed. See id.
---------------------------------------------------------------------------
G. Order Entry, Execution, and Price Parameter Checks
The Exchange proposed to adopt the following four mandatory
activity-based risk protections under proposed C2 Rule 6.17(g): \28\
---------------------------------------------------------------------------
\28\ Other exchanges maintain similar activity-based risk
protections. See, e.g., International Securities Exchange, LLC
(``ISE'') Rule 714(d) and MIAX Rule 519A.
---------------------------------------------------------------------------
(i) the total number of orders (of all order types) and auction
responses entered and accepted by the System (``orders entered'');
(ii) the total number of contracts (from orders and auction
responses) executed on the System, which does not count stock contracts
executed as part of stock-option orders (``contracts executed'');
(iii) the total number of orders the System books or cancels \29\
pursuant to the drill through price check parameter (as amended by this
proposed rule change) in proposed Rule 6.17(a)(2) (``drill through
events''); and
---------------------------------------------------------------------------
\29\ As discussed above, orders (or unexecuted portions) that by
their terms cancel if they do not execute immediately will be
cancelled rather than rest in the book for a period of time (as
proposed in this filing) pursuant to the drill through price check
parameter if triggered. According to the Exchange, because these
orders will not book or be cancelled pursuant to the drill through
price check parameter (but rather because of their terms), these
orders will not be included in the count for the drill through event
check. See Notice, supra note 3, at 76676 n.32.
---------------------------------------------------------------------------
(iv) the total number of orders the System cancels pursuant to the
limit order price parameters in Rules 6.13, Interpretation and Policy
.04(f) and (g), and 6.17(b) (``price reasonability events'').
When a TPH exceeds a parameter within one of the time intervals set
by C2, the System will (i) reject all subsequent incoming orders and
quotes, (ii) cancel all resting quotes, and (iii) for the orders
entered and contracts executed checks, if the TPH requests, cancel
resting orders in the manner specified by the TPH (either all orders,
orders with time-in-force of day, or orders entered on that trading
day).\30\
---------------------------------------------------------------------------
\30\ The Exchange expects the initial time intervals for all
these checks to be set at one and five minutes. The time intervals
set by the Exchange will apply to all TPHs, who will not be able to
change these time intervals. See Notice, supra note 3, at 76676
n.33.
---------------------------------------------------------------------------
The System will not accept new orders or quotes from a restricted
acronym or login until the Exchange receives the TPH's manual
notification to reactivate its ability to send orders and quotes. While
an acronym or login is restricted, a TPH may continue to interact with
any resting orders (i.e., orders not cancelled pursuant to this
protection) entered prior to its acronym or login becoming restricted,
including receiving trade execution reports and canceling resting
orders.
H. Maximum Contract Size
The Exchange proposed to adopt a maximum contact size risk control
pursuant to which the System will reject a TPH's incoming order or
quote (including both sides of a two-sided quote) if its size exceeds
the TPH's designated maximum contract size parameter.\31\ Each TPH must
provide a maximum contract size for each of simple orders, complex
orders, and quotes applicable to an acronym or, if the TPH requests, a
login.\32\
---------------------------------------------------------------------------
\31\ See proposed C2 Rule 6.17(h). The Exchange represented that
other options exchanges have adopted similar functionality. See
Notice, supra note 3, at 76678 n.40; MIAX Rule 519(b).
\32\ For purposes of determining the contract size of an
incoming order or quote, the proposed rule states the contract size
of a complex order will equal the contract size of the largest
option leg of the order (i.e., if the order is a stock-option order,
this check will not apply to the stock leg of the order). See
proposed C2 Rule 6.17(h). If a TPH enters an order or quote to
replace a resting order or update a resting quote, and the System
rejects the incoming order or quote because it exceeds the
applicable maximum contract size, the System also will cancel the
resting order or any resting quote in the same series. In addition,
the Exchange proposed to apply this check to paired orders submitted
to AIM or SAM. Further, the Exchange proposed that for an A:AIR
order, if the System rejects the agency order, then the System
rejects the contra-side order; however, if the System rejects the
contra-side order, the System still accepts the agency order. See
proposed C2 Rule 6.17(h)(2).
---------------------------------------------------------------------------
I. Kill Switch
The Exchange further proposed to adopt a kill switch, which will be
on optional tool allowing a TPH to send a message to the System to, or
contact the Exchange Help Desk to request that, the Exchange cancel all
its resting quotes, resting orders (either all orders, orders with
time-in-force of day, or orders entered on that trading day), or both,
and thereafter reject all subsequent incoming quotes and/or orders.\33\
The System will send a TPH an automated message when it has processed a
kill switch request and thereafter will not accept new orders or quotes
from a restricted acronym or login until the Exchange receives the
TPH's manual notification to reactivate its ability to send orders and
quotes.
---------------------------------------------------------------------------
\33\ See proposed C2 Rule 6.17(i). The Exchange represented that
other options exchanges have adopted similar kill switches. See
Notice, supra note 3, at 76678; BOX Options Exchange LLC (``BOX'')
Rule 7280 and PHLX Rule 1019(b).
---------------------------------------------------------------------------
According to the Exchange, the kill switch message will be accepted
by the System in the order of receipt in the queue and will be
processed in that order so that interest already in the System will be
processed prior to the kill switch message.\34\ Moreover, a Market-
Maker's utilization of the kill switch, and subsequent removal of its
quotes, will not diminish or relieve the Market-Maker of its obligation
to provide continuous two-sided quotes. Market-Makers will continue to
be required to provide continuous two-sided quotes on a daily basis,
and a Market-Maker's utilization of the kill switch will not prohibit
the Exchange from taking disciplinary action against the Market-Maker
for failing to meet the continuing quoting obligation each trading
day.\35\
---------------------------------------------------------------------------
\34\ See Notice, supra note 3 at 76681.
\35\ See id.
---------------------------------------------------------------------------
J. Quote Risk Monitor Mechanism
Lastly, the Exchange proposed to amend the QRM Mechanism in C2 Rule
8.12. Pursuant to the QRM mechanism, a Market-Maker may establish a (i)
maximum number of contracts, (ii) a maximum cumulative percentage of
the original quoted size of each side of each series, and (iii) the
maximum number of series for which either side of its quote is fully
traded, that may trade within a rolling time period in milliseconds
also established by the Market-Maker. When these parameters are
exceeded within the time interval, the System cancels the Market-
Maker's quotes in the class and other classes with the same underlying.
In addition, C2 Rule 8.12 allows Market-Makers or TPH organizations to
specify
[[Page 92931]]
a maximum number of QRM incidents across all classes on an Exchange-
wide basis. When the Exchange determines that a Market-Maker or TPH
organization has reached its QRM incident limit during the rolling time
interval, the System will cancel all of the Market-Maker's electronic
quotes and Market-Maker orders resting in the book in all option
classes on the Exchange and prevent the Market-Maker or TPH
organization from sending additional quotes or orders to the Exchange
until the Market-Maker reactivates its ability to send quotes or
orders.
Currently, use of the QRM is optional. The Exchange proposed to
amend C2 Rule 8.12 to make it mandatory for Market-Makers to enter
values for each parameter for all classes in which they quote.\36\
---------------------------------------------------------------------------
\36\ The Exchange represented that other options exchanges have
made similar functionality mandatory for all Market-Makers. See
Notice, supra note 3, at 76679; ISE Rule 804(g).
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \37\
and the rules and regulations thereunder applicable to the
Exchange.\38\ Specifically, the Commission finds that the proposed rule
change is consistent with the Section 6(b)(5) \39\ 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. The Commission believes that
the proposed rule change is designed to mitigate the likelihood of
orders trading at potentially erroneous prices, clarify when certain
price/risk controls will apply, and assist TPHs in managing their risk
exposure to avoid potentially harmful and disruptive trading. Moreover,
the Commission notes that it recently approved proposed rule changes to
CBOE rules that are substantially similar to the C2 proposed rule
changes that are the subject of this Order.\40\
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(b).
\38\ In approving these proposed rule changes, the Commission
has considered the proposed rules' impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\39\ 15 U.S.C. 78f(b)(5).
\40\ See Securities Exchange Act Release No. 79244 (November 4,
2016), 81 FR 79063 (November 10, 2016) (approving CBOE proposed rule
changes relating to price protection mechanisms and risk controls).
---------------------------------------------------------------------------
As discussed above, C2 is proposing to amend its limit order price
parameter for simple orders to use the NBBO when available in lieu of
the Exchange's previous day's closing price or BBO. To the extent that
the use of the NBBO, when available, rather than the Exchange's
previous day's closing price or BBO, may better reflect the then
current market, it should provide a suitable measure for purposes of
determining the reasonability of the prices of orders. Moreover, the
Commission believes that it is reasonable for C2 to exclude orders with
a stop contingency from the limit order price check parameter, as
application of the limit order price check parameter to such orders may
interfere with the application of the stop contingency.
Further, the Commission believes that the proposed rule change to
expand the applicability of the put strike price and call underlying
value checks to market orders \41\ may help TPHs mitigate risks
associated with orders trading at prices that exceed a corresponding
benchmark, which may indicate an execution at a price that is
potentially erroneous.
---------------------------------------------------------------------------
\41\ The checks will not apply to market orders during an
opening rotation since separate price protections will apply during
the opening process. See Notice, supra note 3, at 76680.
---------------------------------------------------------------------------
The proposed changes to the drill through price checks provide
additional detail to the rule regarding how the System will handle
certain orders in the event that the Exchange activates HAL or SAL,
such as orders that were not exposed prior to trading up to the drill
through price and orders that traded up to the drill through price
following exposure. In addition, allowing the remainder of orders to
rest in the book for a brief time period at the drill through price may
benefit investors by providing an additional opportunity for execution
of their orders. Furthermore, clarifying that an order exposed via HAL
pursuant to the drill through price check will not be exposed at a
price worse than the NBBO is consistent with the current treatment of
other orders exposed via HAL at the NBBO.\42\
---------------------------------------------------------------------------
\42\ See current and proposed C2 Rule 6.18(b).
---------------------------------------------------------------------------
The Commission also believes that the proposed amendments to the
quote inverting NBBO check will provide market participants with
greater clarity that C2 will not apply the check in the absence of an
NBBO or BBO. In addition, the proposed rule change eliminates the
Exchange's flexibility to apply the check prior to the opening of a
series as well as during a trading halt. Removing this flexibility and
clearly stating when C2 will not apply the check considerably enhances
the transparency of the functionality.
With respect to C2's proposed changes regarding the execution of
quotes that lock or cross the NBBO (Proposed Rule 6.17(f)), the
Commission believes that the proposed rule change to not apply the
check when the NBBO is locked, crossed or unavailable, and to allow the
Exchange to disable this check in the interest of maintaining a fair
and orderly market, will prevent the System from cancelling quotes when
there is no reliable benchmark or when prices on quotes may not be
erroneous but rather reflect a rapidly changing market. Moreover, to
the extent the Exchange determines to temporarily deactivate the check
in the interest of maintaining a fair and orderly market, C2 has
represented that all such decisions by C2 will be adequately justified,
documented, retained, and periodically reviewed.\43\
---------------------------------------------------------------------------
\43\ See supra note 27 and accompanying text.
---------------------------------------------------------------------------
Further, the Commission believes that the Exchange's proposed risk
protection parameters and mechanisms for orders and quotes are
reasonably designed to provide TPHs with additional tools to assist
them in managing their risk exposure. Specifically, the order entry,
execution, and price parameter rate checks, maximum contract size risk
control, and mandatory use of the QRM may help TPHs to mitigate the
potential risks associated with entering too many orders or quotes,
executing too many contracts, having too many orders cancelled because
of price protection parameters, and entering orders or quotes with size
that may be potentially erroneous that may result from, for example,
technology issues with the broker's electronic trading system. To this
extent, these TPH-customizable settings may help act as a backstop to
the TPH's own controls and provide an additional layer of protection
customized to the TPH's self-selected parameters. In addition to the
CBOE filing mentioned above, the Commission notes that other exchanges
have established similar risk protection mechanisms.\44\ The Commission
notes that the proposed functionality, including the cancellation of
any resting interest, must be processed in sequence with other interest
in the System and
[[Page 92932]]
comply with the firm quote obligations in Rule 602 of Regulation NMS.
---------------------------------------------------------------------------
\44\ See ISE Rules 714(d) & 804(g); MIAX Rules 519(b) & 519A.
---------------------------------------------------------------------------
C2 will require TPHs and Market-Makers to utilize these risk
protection parameters and mechanisms. However, TPHs and Market-Makers
will have discretion to customize the parameters in accordance with
their respective risk management needs. In light of this flexibility,
the Commission reminds TPHs to be mindful of their obligations, to
among others, seek best execution of orders they handle on an agency
basis and consider their best execution obligations when establishing
parameters for the order entry, execution, price parameter rate checks,
maximum contract size risk control, and QRM.\45\ For example, an
abnormally low order entry parameter should be carefully scrutinized,
particularly if a TPH's order flow to the Exchange contains agency
orders. To the extent that a TPH chooses sensitive parameters and those
parameters apply to connections over which it transmits customer orders
to the Exchange, a TPH should consider the effect of its chosen
settings on its ability to receive a timely execution on marketable
agency orders that it sends to the Exchange in various market
conditions. The Commission cautions brokers considering their best
execution obligations to be aware that an agency order they represent
may be rejected as a result of these risk protections.
---------------------------------------------------------------------------
\45\ See, e.g., Securities Exchange Act Release Nos. 37619A
(September 6, 1996), 61 FR 48290 (September 12, 1996) (Order
Handling Rules adopting release); 51808 (June 9, 2005), 70 FR 37496,
37537-8 (June 29, 2005) (Regulation NMS adopting release).
---------------------------------------------------------------------------
In addition, in light of the Exchange's decision not to set maximum
or minimum values, or default values, the Commission expects C2 to
periodically assess whether these risk protection measures are
operating in a manner that is consistent with the promotion of fair and
orderly markets, including whether not utilizing maximum and minimum
parameters or default values continues to be appropriate and in
accordance with the Act and the rules thereunder.
Further, the Commission believes that Proposed Rule 6.17(i), which
creates an optional kill switch mechanism, is consistent with the Act
as it may further enhance risk management capabilities of TPHs by
providing them with the ability to manage their risk exposure if they
experience a significant system failure. To the extent that the kill
switch mechanism provides TPHs with an appropriate backstop in this
manner, it may encourage firms to provide liquidity on C2 and thus
contribute to fair and orderly markets in a manner that protects
investors and the public interest. The Commission notes that the
Exchange represented in its proposal that the kill switch will operate
consistently with a broker-dealer's firm quote obligations pursuant to
Rule 602 of Regulation NMS,\46\ and that the kill switch does not
diminish or relieve a Market-Maker of its obligation to provide
continuous two-sided quotes.\47\ The Exchange also represented that the
kill switch message will be accepted by the System in the order of
receipt in the queue and will be processed in such order. As such, the
System will process interest already in the System prior to receipt of
the kill switch message prior to processing the kill switch
message.\48\ Based on these representations, the Commission believes
that the kill switch is reasonably designed to promote just and
equitable principles of trade and perfect the mechanism of a free and
open market. Lastly, the Commission notes that in addition to the CBOE
filing mentioned above, other exchanges have established kill switches
that operate in a manner similar to that proposed by C2.\49\
---------------------------------------------------------------------------
\46\ See Notice, supra note 3, at 76681.
\47\ See id.
\48\ See id.
\49\ See, e.g., BOX Rule 7280(b) and PHLX Rule 1019(b).
---------------------------------------------------------------------------
Finally, the Commission believes that the proposal to authorize C2
to share with Clearing TPHs the risk mitigation settings selected by a
TPH for whom the Clearing TPH clears may assist Clearing TPHs manage
their clearing risk exposure. In addition to the CBOE filing mentioned
above, the Commission notes that other exchanges have adopted similar
rules authorizing the sharing of similar risk settings with clearing
members.\50\
---------------------------------------------------------------------------
\50\ See, e.g., MIAX Rule 500; BX Chapter VI, Section 20; NYSE
Arca Rule 6.2A(a); NYSE MKT Rule 902.1NY(a); and PHLX Rule 1016.
---------------------------------------------------------------------------
IV. Conclusion
It Is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\51\ that the proposed rule change (SR-C2-2016-020), be, and hereby
is, approved.
---------------------------------------------------------------------------
\51\ See id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
---------------------------------------------------------------------------
\52\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-30560 Filed 12-19-16; 8:45 am]
BILLING CODE 8011-01-P
