[Federal Register Volume 77, Number 218 (Friday, November 9, 2012)]
[Notices]
[Pages 67424-67427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27360]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68154; File No. SR-C2-2012-036]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to System Access, Connectivity, and Testing

November 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 23, 2012, C2 Options Exchange, Incorporated (the 
``Exchange'' or ``C2'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding System \3\ 
access, connectivity, and testing by Participants. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.c2exchange.com/Legal/), at the Exchange's Office of the Secretary, 
and at the Commission.
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    \3\ The System means the automated trading system used by the 
Exchange for the trading of options products.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its rules regarding System access, 
connectivity, and testing by Participants. The Exchange makes available 
to Participants various application programming interfaces 
(``APIs''),\4\ such as CBOE Market Interface (``CMi'') and Financial 
Information eXchange (``FIX'') Protocol, for authorized Participants to 
use to access the System.\5\ Participants may select which of these 
APIs they would like to use to connect to the System when registering 
with the Exchange for System access. The Exchange believes it is 
important to provide Participants with this flexibility so that they 
can determine the API that will be most compatible with their systems 
and maximize the efficiency of their systems' connection to the System. 
Connection to the System allows authorized Participants to enter and 
execute orders, as well as submit certain order and trade data to the 
Exchange, which data the Exchange uses to conduct surveillances of its 
markets and Participants.
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    \4\ APIs are computer programs that allow Participants to 
interface with the Exchange.
    \5\ Only Participants may access the System. The Commission 
adopted Rule 15c3-5 under the Act, which, among other things, 
requires broker-dealers providing others with access to an exchange 
or alternative trading system to establish, document, and maintain a 
system of risk management controls and supervisory procedures 
reasonably designed to manage the financial, regulatory, and other 
risks of providing such access. See Securities Exchange Act Release 
No. 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010). Rule 
15c3-5 effectively eliminated ``naked access'' (i.e. ``Sponsored 
Users'') to the Exchange by non-Participants and effectively 
requires Participants to filter all non-Participant orders prior to 
being sent to the Exchange. The Exchange expects to eliminate the 
concept of sponsored use under its Rules in connection with the 
adoption of Rule 15c3-5 in a separate rule filing.
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    After a Participant registers with the Exchange to use a specific 
API, the Exchange may require the Participant to use a specific 
connectivity protocol that, among other things, may require the input 
of certain information (e.g. trading acronym, category of Participant) 
during the connectivity process in accordance with technical 
specifications established by the Exchange. The Exchange may prescribe 
a specific connectivity protocol for all Participants, or for certain 
categories of similarly situated Participants (e.g. Market-Makers, 
Designated Primary Market-Makers (``DPMs'')).
    It is imperative for the Exchange to receive during the 
connectivity process information regarding a Participant's 
identification so that the Exchange can ensure that the connecting 
party is a Participant authorized to access the System and that the 
Exchange is aware of what type of Participant the connecting party is. 
Requiring a specific connectivity protocol allows the Exchange to 
receive this information in a uniform manner for all Participants, or 
categories of similarly situated Participants, as the Exchange deems 
necessary. This information allows the Exchange to, among other things, 
perform the necessary surveillances applicable to the Participant and 
determine whether the Participant is complying with all relevant 
Exchange Rules. Many of the Exchange's surveillances are conducted by 
type of Participants, as different types have

[[Page 67425]]

different responsibilities they must meet under the Exchange rules.\6\ 
The Exchange believes that receiving trade data in an organized and 
uniform format from all Participants, or types of Participants, allows 
it to efficiently identify Participants and monitor and conduct 
surveillances of its markets and Participant, and thus effectively 
fulfill its regulatory responsibilities. Additionally, the Exchange 
believes that prescribing connectivity protocols on either all 
Participants or categories of similarly situated Participants ensures 
that the Exchange makes these prescriptions in an objective manner.
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    \6\ For example, a DPM must satisfy quoting obligations that are 
different than those that a Market-Maker must satisfy, and the 
Exchange reviews their quoting activity to determine whether they 
have satisfied their respective obligations. See Rule 8.17 
(obligations of DPMs) and Rule 8.5 (obligations of Market-Makers).
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    The Exchange also periodically requires Participants that have been 
authorized to access the System to conduct or participate in the 
testing of their computer systems to ascertain the compatibility of 
these systems with the System. The Exchange believes that it is 
critical that Participants work closely with the Exchange in testing 
new software releases and other System changes. System testing allows 
the Exchange to ensure that Participants' systems are continuously 
compatible with the System in the event of System changes and that the 
Exchange continues to receive all necessary data from Participants in a 
timely manner and efficient format. Additionally, System testing allows 
Participants to make any necessary adjustments to their systems in the 
event of System changes to ensure that their connections to the System 
are functioning properly and that they are able to submit order and 
trade information in compliance with all applicable Exchange Rules.
    The Exchange proposes to codify these current Exchange practices 
and requirements related to System access and connectivity. Proposed 
Rule 6.34(c) clarifies in the Rules that only Participants (and their 
associated persons) may be authorized to access the System to enter and 
execute orders. This proposed provision also provides that the Exchange 
will require a Participant to enter into a software user or license 
agreement with the Exchange in a form or forms prescribed by the 
Exchange in order to obtain authorized access to the System if the 
Participant elects to use an API for which the Exchange has determined 
that this type of an agreement is necessary. In other words, whether 
the Exchange requires a Participant to enter into a user or license 
agreement will depend solely on the objective criteria of what type of 
API the Participant opts to use.\7\ The proposed rule change also 
amends Rule 6.34(a) to clarify that the term API means application 
programming interface.
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    \7\ For example, the Exchange developed CMi and currently 
requires all Participants that opt to connect to the System using 
CMi to enter into a software license agreement with the Exchange to 
use CMi. The Exchange has determined that Participants that opt to 
connect to the System using FIX do not currently have to enter into 
any type of software user or license agreement, which is a 
universally available application for which the developer does not 
require a user agreement.
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    Proposed Rule 6.34(d) provides that the Exchange may prescribe 
technical specifications pursuant to which all Participants, or 
categories of similarly situated Participants (e.g., DPMs, Market-
Makers), may establish an electronic connection to the System (and any 
facilities). The Exchange will announce to Participants via Regulatory 
Circular any connectivity protocol prescription.
    Proposed Rule 6.34(e)(i) provides that each Participant that the 
Exchange designates as required to participate in a system test must 
conduct or participate in the testing of its computer systems to 
ascertain the compatibility of such systems with the System in the 
manner and frequency prescribed by the Exchange. The Exchange will 
designate Participants as required to participate in a system test 
based on: (1) The category of the Participant (e.g. DPM, Market-Maker); 
(2) the computer system(s) the Participant uses; and (3) the manner in 
which the Participant connects to the System. The Exchange will give 
Participants reasonable notice of any mandatory systems test, which 
notice will specify the nature of the test and Participants' 
obligations in participation in the test.
    In connection with this mandatory system testing, proposed Rule 
6.34(e)(ii) provides that every Participant required by the Exchange to 
conduct or participate in testing of computer systems must provide to 
the Exchange any reports relating to the testing as the Exchange may 
prescribe. Participants must maintain adequate documentation of tests 
required by this Rule and results of this testing for examination by 
the Exchange.
    Proposed Rule 6.34(e)(iii) states that a Participant that fails to 
conduct or participate in mandatory systems tests, fails to file the 
required reports, or fails to maintain the required documentation, as 
required by proposed Rule 6.34(e)(i) and (ii), may be subject to 
summary suspension or other action taken pursuant to Chapter 16 
(Summary Suspension) and/or disciplinary action pursuant to Chapter 17 
(Discipline) of the Exchange Rules. Disciplinary action may include 
fines pursuant to proposed Rule 17.50(g)(19), which provides that 
Participants that violate proposed Rule 6.34(e) may be subject to fines 
under the Exchange's minor rule violation plan.\8\ As with all other 
violations in the Exchange's minor rule violation plan, the Exchange 
retains the ability to refer a violation of the system testing 
requirements to its Business Conduct Committee should the circumstances 
warrant such a referral. The Exchange believes that violations of the 
proposed mandatory system testing provision are suitable for its minor 
rule violation plan because they are generally technical in nature. 
Further, including these violations into the minor rule violation plan 
will allow the Exchange to carry out its regulatory responsibilities 
more quickly and efficiently.
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    \8\ These fines are as follows: $250 for the first offense, $500 
for the second offense, $1,000 for the third offense, $2,000 for the 
fourth offense, and referral to the Business Conduct Committee for 
any subsequent offenses. The fines are based on the number of 
offenses in one calendar year.
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    Codification of these requirements gives the Exchange the ability 
to discipline any Participants that fail to comply with these 
requirements. While Participants generally comply with these 
requirements, their inclusion in the Rules (and the resulting potential 
for discipline for noncompliance) may enhance Participants' overall 
compliance with them.
    Codification of these requirements is also consistent with the 
Rules of other exchanges. Proposed Rule 6.34(c) is substantially 
similar to: BATS Exchange, Inc. (``BATS'') Rule 11.3(a); BOX Options 
Exchange LLC (``BOX'') Rule 7000(a); EDGA Exchange, Inc. (``EDGA'') 
Chapter XI, Rule 11.3(a); EDGX Exchange, Inc. (``EDGX'') Chapter XI, 
Rule 11.3(a); International Securities Exchange, LLC (``ISE'') Rule 
706(a); NASDAQ Option Market (``NOM'') Chapter V, Section 1(a); NYSE 
Arca, Inc. (``NYSE Arca'') Rule 6.2A(a); and NYSE MKT LLC (``NYSE 
MKT'') Rule 902.1NY(a). Proposed Rule 6.34(e) is substantially similar 
to: BATS Rule 18.13; BOX Rule 3180; ISE Rule 419; and NOM Chapter III, 
Section 13. BOX Rule 12140(d)(7) and ISE Rule 1614(d)(8) also allow 
those exchanges to fine their members for violations of their 
respective mandatory system provisions pursuant to their respective 
minor rule violation plans.\9\
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    \9\ The proposed fine amounts in proposed Rule 17.50(g)(19) are 
the same as the fine amounts in the corresponding BOX and ISE rules.

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[[Page 67426]]

    Additionally, proposed Rule 6.34(c) is consistent with Rule 15c3-1 
[sic] under the Act.\10\
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    \10\ See supra note 5.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\11\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, 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 
to perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.\12\ Additionally, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) requirement that the 
rules of a national securities exchange be designed to not permit 
unfair discrimination between customer, issuers, brokers or 
dealers.\13\ The Exchange also believes the proposed rule change is 
consistent with the Section 6(b)(6) \14\ requirement that the rules of 
an exchange provide that its members and persons associated with its 
members be appropriately disciplined for violation of the provisions of 
the Act, the rules and regulations thereunder, or the rules of the 
exchange, by expulsion, suspension, limitation of activities, 
functions, and operations, fine, censure, being suspended or barred 
from being associated with a member, or any other fitting sanction.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
    \14\ 15 U.S.C. 78f(b)(6).
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    The proposed rule change codifies current Exchange requirements 
that enhance C2's market surveillances and System functionality. 
Proposed Rule 6.34(c) is consistent with Rule 15c3-5 under the Act, and 
the Exchange believes the proposed rule change promotes compliance by 
Participants with the market access requirements under that rule. The 
Exchange believes that proposed Rule 6.34(d) allows the Exchange to 
receive from Participants, or categories of similarly situated 
Participants, information in a uniform format, which aids the 
Exchange's efforts to monitor and regulate C2's markets and 
Participants and helps prevent fraudulent and manipulative practices. 
This also helps coordinate the ability of Participants to 
electronically trade on the Exchange with the Exchange's ability to 
receive the necessary information to regulate those transactions. 
Proposed Rule 6.34(e) allows the Exchange to ensure that Participants' 
connections to the System function correctly, which promotes efficiency 
and enhances compliance by Participants with Exchange Rules.
    In addition, codification of these requirements is consistent with 
the Act because it gives the Exchange the ability to discipline 
Participants that fail to comply with these requirements, which may 
enhance overall Participants compliance with these requirements. This 
proposed rule change will also promote consistency in the minor rule 
violation programs of other exchanges and allow the Exchange to carry 
out its regulatory responsibilities more quickly and efficiently by 
including violations of the mandatory system testing provision in the 
Exchange's minor rule violation plan.
    The Exchange believes that the proposed rule change is designed to 
not permit unfair discrimination among Participants, as the proposed 
rule change provides for the Exchange to impose requirements on 
Participants in an objective manner. For example, under proposed Rule 
6.34(d), the Exchange may impose connectivity protocol requirements on 
all Participants, or similarly situated Participants. Additionally, 
under proposed Rule 6.34(c), whether the Exchange requires a 
Participant to enter into a software user or license agreement depends 
solely on what type of API the Participant opts to use to connect to 
the System.
    Finally, the proposed rule change will help remove impediments to 
and promote a free and open market and a national market system because 
it is consistent with rules in place at other exchanges and imposes 
substantially similar requirements on Participants as those rules do on 
those exchanges' members.

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

    C2 does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) \15\ of the Act and 
Rule 19b-4(f)(6) \16\ thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of this 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. 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 email to [email protected]. Please include 
File Number SR-C2-2012-036 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-C2-2012-036. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/

[[Page 67427]]

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 on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal offices 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-C2-2012-036, and should be submitted on 
or before November 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27360 Filed 11-8-12; 8:45 am]
BILLING CODE 8011-01-P