[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69478-69481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28418]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63246; File No. SR-C2-2010-007]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated: 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to PULSe Fees

November 4, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 28, 2010, C2 Options Exchange, Incorporated (the 
``Exchange'' or ``C2'') 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 has designated this proposal as one establishing 
or changing a due, fee, or other charge imposed by the Exchange under 
Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) 
thereunder.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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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 Fees Schedule to adopt fees for 
the use of a front-end order entry workstation, referred to as PULSe, 
that will be a facility of the Exchange. The text of the proposed rule 
change is available on the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's Office of the Secretary and at the 
Commission.

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, Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to establish fees 
relating to the use of the PULSe order entry workstation on C2, which 
fees are modeled after the fees established for C2 affiliates Chicago 
Board Options Exchange, Incorporated (``CBOE'') and the CBOE Stock 
Exchange (``CBSX'').
    The PULSe workstation is a front-end order entry system designed 
for use with respect to orders that may be sent to the trading systems 
of C2.\5\ In addition to providing the capability to send orders to the 
C2 market, the PULSe workstation will also provide a user with the 
capability to send options orders to other U.S. options exchanges 
(including CBOE) and stock orders to other U.S. stock exchanges 
(including CBSX) through a ``PULSe Routing Intermediary'' as further 
described below (``away-market routing''). Additionally, the PULSe 
workstation functionality will include access to consolidated real-time 
options and stock market data.\6\
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    \5\ The Exchange represents that the PULSe workstation is merely 
a new front-end system interface to existing C2 trading systems 
(i.e., it is a new means of connecting to these existing trading 
systems), and does not require any changes to the Exchange's 
surveillance or communications rules. Further, there is no change 
to, or impact on, the Exchange's market structure as a result of the 
PULSe workstations.
    \6\ The workstation will also have the capability to enable a 
user to send orders for commodity futures and commodity options to 
designated contract markets and other venues of the user's choice at 
which the user has trading privileges and to futures commission 
merchants (each, an ``FCM'') and introducing brokers (each, an 
``IB'') of the user's choice. The workstation may also have the 
capability to enable a user to send orders in other non-security 
products to one or more destinations of the user's choice.
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    The PULSe workstation will be made available by Signal Trading 
Systems, LLC (``STS''). STS is an affiliate of CBOE that is jointly 
owned by CBOE and FlexTrade Systems, Inc. (``FlexTrade''), a technology 
services provider. STS will grant licenses to use the workstation 
directly to C2 Permit Holders (``Permit Holders'') and their customers, 
including Sponsored Users. STS may

[[Page 69479]]

also determine to permit Permit Holders to make the workstation 
available to their customers, including Sponsored Users, through the 
use of a sublicense. However, whether the workstation technology is 
obtained through a direct license or sublicense from STS, any order 
routed to C2 through a PULSe workstation must be routed through a 
Permit Holder or by a Sponsored User (whose orders are sponsored by a 
Permit Holder).\7\ The Permit Holder will also be responsible for any 
applicable fees, which are described below.
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    \7\ The PULSe workstation may be made available by a TPH to its 
customers on a pass-through basis (where orders pass through the 
TPH's systems prior to reaching the Exchange) or a sponsored access 
basis. To the extent that a TPH makes the workstation available to a 
customer on a sponsored access basis, the customer would be 
considered a ``sponsored user'' and the TPH-customer relationship 
would be considered a Sponsoring Participant/Sponsored User 
relationship subject to the requirements of Rule 3.15, Sponsored 
Users.
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    The Exchange proposes a monthly PULSe workstation fee to Permit 
Holders of $350 per Permit Holder workstation per month for the first 
10 PULSe workstations and $100 per Permit Holder workstation per month 
for each additional PULSe workstation. As discussed further below, 
Permit Holders may also make the workstation available to their 
customers, which may include non-broker dealer public customers and 
non-Permit Holder broker dealers (referred to herein as ``non-Permit 
Holders''). For such non-Permit Holder workstations, the Exchange 
proposes to introduce a flat fee of $350/month per workstation. In 
instances where two or more Permit Holders wish to make a PULSe 
workstation available to the same non-Permit Holder customer, the 
Exchange is proposing to introduce a fee reduction. Under the 
reduction, if two or more Permit Holders make the PULSe workstation 
available to the same non-Permit Holder customer, then the monthly fee 
will be $250 per workstation per Permit Holder. The Exchange also 
proposes an away-market routing fee to the entering Permit Holder of 
$0.10 per executed options contract (or equivalent share amount in the 
case of stock) for away-market routing of orders through the PULSe 
workstation.
    The Exchange notes that the PULSe workstation offers the ability to 
route orders to any market, including CBOE. Therefore, to the extent a 
C2 TPH that is also a CBOE TPH obtains a PULSe workstation through C2, 
it is not necessary for that TPH to obtain a separate PULSe workstation 
through CBOE to route orders to CBOE. When the PULSe workstation is 
made available through C2 to a C2 TPH that is also a CBOE TPH, the 
PULSe workstation, away-market routing, and Routing Intermediary fees 
would be assessed by C2 only (e.g., the monthly fee to a C2 TPH for one 
PULSe is $350 and the monthly fee for a CBOE TPH for one PULSe 
workstation is $350; if a PULSe workstation is made available through 
C2 to a C2 TPH that is also a CBOE TPH, the monthly fee would be $350, 
not $700). To the extent a C2 TPH is also a CBOE TPH, the away-market 
routing fee would not apply for the TPH's executions on C2 or CBOE 
because the fee is only applicable for away-market routing. The TPH 
would not be routing away, but instead would be submitting orders 
directly to C2 as a C2 TPH or CBOE as a CBOE TPH, as applicable, where 
the TPH's activity would be subject to the transaction fee schedule of 
C2 or CBOE, respectively. However, to the extent a C2 TPH is not a CBOE 
TPH, the away-market routing fee would apply to the C2 TPH's executions 
on CBOE.
    The Exchange believes the fee structure represents an equitable 
allocation of reasonable fees in that the same fees are applicable to 
all users. The Exchange believes the workstation and routing 
intermediary fees are competitive with fees applicable to similar 
workstations that offer away-market routing services provided by other 
exchanges. The Exchange also believes it is reasonable and appropriate 
to reduce the monthly PULSe workstation fee when two or more TPHs make 
a workstation available to the same non-Permit Holder because, while we 
would still establish and maintain PULSe workstation technology 
arrangements with each TPH, we also anticipate that the non-Permit 
Holder's use of the workstation would be distributed among the TPHs. In 
addition, the Exchange believes that the $0.10 away-market routing fee 
is reasonable and appropriate in light of the fact that it is small in 
relation to the value to the user of the PULSe workstation and its 
extensive functionality, including its ability to facilitate the 
routing of orders to any securities exchange and in relation to the 
total costs typically incurred in routing and executing orders. The 
Exchange believes it is not necessary to apply this fee to a C2 TPH's 
executions on C2 (or to a dual C2 TPH/CBOE TPH's executions on CBOE) 
because the TPH is not routing away. Instead the TPH is submitting 
orders directly to C2 (or CBOE, as applicable) where the activity is 
subject to the transaction fee schedule of C2 (or CBOE, respectively). 
The Exchange also notes that use of the PULSe workstation and the away-
market routing functionality available through the PULSe workstation 
are not compulsory. The services are to be offered as a convenience to 
Permit Holders and would not be the exclusive means available to a 
Permit Holder to send orders to C2, CBOE, CBSX or intermarket.
    The PULSe workstation may be configured by the Exchange to cause C2 
and/or CBOE to be the default destination exchange(s) for individually 
executed marketable option orders if C2 and/or CBOE is at the national 
best bid or offer (``NBBO''), regardless of size or time, but will 
allow any user to manually override C2 and/or CBOE as the default 
destination on an order-by-order basis.\8\ Similarly, the PULSe 
workstation may also be configured by the Exchange to cause CBSX to be 
the default designation exchange for individually executed marketable 
stock orders if CBSX is at the NBBO, regardless of size or time, but 
will allow the user to manually override CBSX as the default 
destination on an order-by-order basis. The workstation also 
incorporates a function allowing option (stock) orders at a specified 
price to be sent to multiple exchanges with a single click (``sweep 
function''). The sweep function may be configured by the Exchange to 
cause an option order to be sent to C2 and/or CBOE for up to the full 
size quoted by C2 and/or CBOE if C2 and/or CBOE is at the NBBO.\9\ 
Similarly, the sweep function may be configured by the Exchange to 
cause a stock order to be sent to CBSX for up to the full size quoted 
by CBSX if CBSX is at the NBBO. Again, the away-market

[[Page 69480]]

routing functionality is to be offered as a convenience to Permit 
Holders and would not be an exclusive means available to a Permit 
Holder to send orders intermarket.\10\
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    \8\ Nothing about the PULSe order routing functionality would 
relieve any Permit Holder that is using the PULSe workstation from 
complying with its best execution obligations. Specifically, just as 
with any customer order and any other routing functionality, a 
Permit Holder would have an obligation to consider the availability 
of price improvement at various markets and whether routing a 
customer order through the PULSe functionality would allow for 
access to opportunities for price improvement if readily available. 
Moreover, a Permit Holder would need to conduct best execution 
evaluations on a regular basis, at a minimum quarterly, that would 
include its use of the PULSe workstation.
    \9\ For example, if a Permit Holder were to enter an option 
order to buy 250 contracts using the sweep function at a time when 
C2 is at the NBBO for 100 contracts, the sweep function will be 
configured to send an order for 100 contracts to C2, with the 
balance of the order routed as specified by the Permit Holder 
entering the order from the configurations offered by the PULSe 
workstation. Nothing will require a person using the PULSe 
workstation to use the sweep function, and, in this same example, if 
the Permit Holder wished to route the entire order for 250 contracts 
to an exchange other than C2 using the PULSe workstation, the Permit 
Holder will be free to manually override C2 as the default 
destination for the entire order.
    \10\ With respect to options (stocks), the Exchange also notes 
that the away-market functionality in the PULSe workstation will not 
displace the provisions of the Options Order Protection and Locked/
Crossed Market Plan (Regulation NMS), which will continue to apply 
in the circumstances described in the Plan (Regulation NMS).
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    To use the PULSe workstation to route to other markets, a Permit 
Holder must either be a PULSe Routing Intermediary or establish a 
relationship with a PULSe Routing Intermediary. A ``PULSe Routing 
Intermediary'' is a C2 Permit Holder that has connectivity to, and is a 
member of, other options and/or stock exchanges. If a Permit Holder 
sends an order from the PULSe workstation, the PULSe Routing 
Intermediary will route that order to the designated market on behalf 
of the entering Permit Holder. For Permit Holder convenience, CBOE will 
make available a list of PULSe Routing Intermediaries that provide 
third-party routing services. The Exchange proposes that each PULSe 
Routing Intermediary be charged a fee of $20 per PULSe workstation per 
month for each PULSe workstation that is enabled to send orders through 
that Routing Intermediary if another Permit Holder requests routing 
functionality through that Routing Intermediary. The Exchange is 
proposing that the PULSe Routing Intermediary fee be waived through 
December 31, 2010, thus this fee will be assessed beginning January 1, 
2011.
    Finally, the Exchange proposes to introduce a fee for non-standard 
services provided by STS. Non-standard services may include time and 
materials for non-standard installations of or modifications to PULSe 
to accommodate a Permit Holder's use of PULSe with other technologies. 
The Exchange is proposing a fee of $350 per hour plus costs.
    The Exchange believes that the PULSe workstation will constitute a 
``facility'' of C2 \11\ to the extent that it is used with respect to 
orders for options and other securities.\12\ A portion of the fees 
collected by C2 for the use of the workstation will be remitted to 
STS.\13\
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    \11\ The Exchange believes that the PULSe workstation will, in 
the language of Section 3(a)(2) of the Act, 15 U.S.C. 78c(a)(2), 
constitute a property or service ``for the purpose of effecting or 
reporting a transaction on an exchange * * *.''
    \12\ The capability of the workstation to initiate orders for 
commodity futures and commodity options and other non-security 
products to be sent to a designated contract market, FCM, IB or 
other destination that does not constitute an ``exchange'' (as that 
term is defined in Section 3(a)(1), 15 U.S.C. 78c(a)(1), and used in 
Section 3(a)(2), 15 U.S.C. 78c(a)(2), of the Act) will not 
constitute part of the ``facility'' of CBOE.
    \13\ FlexTrade is not, and, at least initially, will not be 
registered as a broker-dealer under Section 15(a) of the Act, 15 
U.S.C. 78o. STS also will not, at least initially, be registered as 
a broker-dealer under Section 15(a) of the Act. In this regard, we 
note the following: (i) C2 (and/or its affiliate, CBOE) will be 
primarily responsible for the marketing of the PULSe workstation. In 
no event will FlexTrade have any role in marketing the PULSe 
workstation. FlexTrade will not be a party to any agreements with 
Permit Holders for the PULSe workstation. (ii) In contributing 
services to STS, FlexTrade will be limited to providing software and 
systems technology and maintaining proper technical functioning. C2 
will be responsible for ensuring that STS's provision of the PULSe 
workstation, as a facility of C2, meets C2's obligations as a self-
regulatory organization. (iii) Unless it becomes registered as a 
broker-dealer under Section 15(a) of the Act, neither STS nor 
FlexTrade will hold itself out as a broker-dealer, provide advice 
related to securities transactions, match orders, make decisions 
about routing orders, facilitate the clearance and settlement of 
executed trades, prepare or send transaction confirmations, screen 
counterparties for creditworthiness, hold funds or securities, open, 
maintain, administer or close brokerage accounts, or provide 
assistance in resolving problems, discrepancies or disputes related 
to brokerage accounts. Should STS or FlexTrade seek to register as a 
broker-dealer in the future, the Exchange represents that the 
broker-dealer would not perform any operations without first 
discussing with the Commission staff whether any of the broker-
dealer's operations should be subject to an Exchange rule filing 
required under the Act, 15 U.S.C. 78s(b)(1).
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    The Exchange notes that FlexTrade engages and will engage in 
business activities in addition to its provision of services to STS and 
that these activities include providing other technology services to 
broker-dealers.\14\ The Exchange also notes that STS may in the future 
engage in business activities in addition to making the PULSe 
workstation facility available, and that these activities may also 
include the provision of other technology services to broker-dealers. 
In this regard: (i) There will be procedures and internal controls in 
place that are reasonably designed so that FlexTrade does not unfairly 
take advantage of confidential information relating to PULSe in its 
other business activities and so that STS will not unfairly take 
advantage of confidential information relating to PULSe to the extent 
that STS engages in any other business activities other than providing 
the PULSe workstation. (ii) The books, records, premises, officers, 
directors, agents, and employees of STS, with respect to the PULSe 
workstation, as a facility of C2, will be deemed to be those of C2 for 
purposes of and subject to oversight pursuant to the Act. (iii) Use of 
the PULSe workstation will be optional. Permit Holders will not be 
required to use the PULSe workstation to initiate their orders, and a 
Permit Holder may use any available order entry system that it selects, 
including one that it develops itself, for use to initiate its orders.
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    \14\ The Exchange notes that FlexTrade is the sole member of a 
single member limited liability company named FlexTrade LLC, that 
FlexTrade LLC is a registered broker-dealer, and that FlexTrade and 
FlexTrade LLC each currently makes a front-end order entry 
workstation named ``FlexTrader'' available. FlexTrade LLC is not a 
Permit Holder of C2.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\15\ in general, and furthers the objectives of Section 6(b)(4) of 
the Act,\16\ in particular, in that it is designed to provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
C2 Permit Holders in that the same fees and fee waivers are applicable 
to all users of the PULSe workstation.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change is designated by the Exchange as 
establishing or changing a due, fee, or other charge, thereby 
qualifying for effectiveness on filing pursuant to Section 
19(b)(3)(A)(ii) of the Act \17\ and subparagraph (f)(2) of Rule 19b-4 
\18\ thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \18\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 69481]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected] Please include 
File Number SR-C2-2010-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR C2-2010-007. This file 
number should be included on the subject line if e-mail 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 (http://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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-C2-2010-007 and should be 
submitted on or before December 3, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. 2010-28418 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P