[Federal Register Volume 80, Number 111 (Wednesday, June 10, 2015)]
[Notices]
[Pages 32997-33001]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14133]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75106; File No. SR-C2-2015-014]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the Solicitation Auction Mechanism

June 4, 2015.
    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 May 27, 2015, 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 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 32998]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rules 6.52 relating to the 
Solicitation Auction Mechanism (``SAM''). The text of the proposed rule 
change is provided below. (additions are italicized; deletions are 
[bracketed])
* * * * *
C2 Options Exchange, Incorporated
Rules
* * * * *
Rule 6.52. Solicitation Auction Mechanism
    A Participant that represents agency orders may electronically 
execute orders it represents as agent (``Agency Order'') against 
solicited orders provided it submits the Agency Order for electronic 
execution into the solicitation auction mechanism (the ``Auction'') 
pursuant to this Rule.
    (a) Auction Eligibility Requirements. A Participant (the 
``Initiating Participant'') may initiate an Auction provided all of the 
following are met:
    (1) The Agency Order is in a class designated as eligible for 
Auctions as determined by the Exchange and within the designated 
Auction order eligibility size parameters as such size parameters are 
determined by the Exchange (however, the eligible order size may not be 
less than 500 standard option contracts or 5,000 mini-option 
contracts);
    (2) Each order entered into the Auction shall be designated as all-
or-none and must be stopped with a solicited order priced at or within 
the NBBO as of the time of the initiation of the Auction (i.e. the time 
that the Agency Order is received in the System (the ``initial auction 
NBBO''); and
    (3) The minimum price increment for an Initiating Participant's 
single price submission shall be determined by the Exchange on a series 
basis and may not be smaller than one cent.
    (b) Auction Process. The Auction shall proceed as follows:
    (1) Auction Period and Requests for Responses.
    (A) To initiate the Auction, the Initiating Participant must mark 
the Agency Order for Auction processing, and specify a single price at 
which it seeks to cross the Agency Order with a solicited order priced 
at or within the initial auction NBBO.
    (B) When the Exchange receives a properly designated Agency Order 
for Auction processing, a Request for Responses message indicating the 
price, side, and size at which it seeks to cross the Agency Order with 
a solicited order will be sent to all Participants that have elected to 
receive such messages.
    (C)-(G) No change.
    (2) Auction Conclusion and Order Allocation. The Auction shall 
conclude at the sooner of subparagraphs (b)(2)(A) through (E) of Rule 
6.51. At the conclusion of the Auction, the Agency Order will be 
automatically executed in full or cancelled and allocated subject to 
the following:
    (A) The Agency Order will be executed against the solicited order 
at the proposed execution price, provided that:
    (i) The execution price must be equal to or better than the initial 
auction NBBO. If the execution would take place outside the initial 
auction NBBO, the Agency Order and solicited order will be cancelled;
    (ii)-(iii) No change.
    . . . Interpretations and Policies:
    .01-.03 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to make changes to its existing SAM auction 
rules in Rule 6.52. The Exchange believes that the proposed amendments 
would ensure greater consistency between the Exchange's SAM auction and 
order protection rules \3\ and provide additional clarity in the Rules 
regarding the Exchange's SAM Auction procedures.
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    \3\ See Section E of C2 Rules Chapter 6 relating to Intermarket 
Linkage (``Intermarket Linkage Rule'') (providing that the rules 
contained in Section E of CBOE Chapter IV relating to the Options 
Order Protection and Locked/Crossed Market Plan shall apply to C2).
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    Rule 6.52 permits Participants to electronically execute all-or-
none (``AON'') orders for 500 or more standard options contracts or 
5,000 or more mini-options contracts that they represent as agent 
(``Agency Order'') against solicited orders provided the Participant 
submits the Agency Order for electronic execution into SAM for auction 
(the ``Auction'') pursuant to Rule 6.52.\4\ Under Rules 6.52(a)(2) and 
(b)(1)(A), each order entered into SAM shall be designated AON by the 
Initiating Participant with the Agency Order marked for auction 
processing with a specific single price at which the Initiating 
Participant seeks to cross the Agency Order with the solicited order. 
Pursuant to Rule 6.52(b)(2)(A)(i), the Agency Order will be executed 
against the solicited order at the proposed execution price, provided 
that, among other things, the execution price must be equal to or 
better than the C2 best bid or offer (``BBO''). If the execution would 
take place outside the BBO, the Agency Order and solicited order will 
be cancelled.\5\
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    \4\ SAM functionality is currently inactive on the Exchange.
    \5\ See Rule 6.52(b)(2)(A)(i).
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    Although Participants are subject to the Exchange's order 
protection rules and thus, prevented from trading through the displayed 
national best bid and offer (``NBBO''), including within the context of 
SAM auctions,\6\ current Rule 6.52 does not specifically require 
Initiating Participants to stop Agency Orders at or within the NBBO or 
expressly prohibit Agency Orders from being executed against solicited 
orders at prices outside the NBBO.\7\ In addition, current Rule 6.52 
does not specify whether the Agency Order may be executed against a 
solicited order priced at or within the BBO as of the time that the 
Agency Order is received in the System,\8\ as of the time of the 
beginning of the auction (i.e. the time when requests for responses 
(``RFRs'')

[[Page 32999]]

are sent), or as of the time of execution.\9\ Accordingly, the Exchange 
is proposing to make several clarifying amendments to Rule 6.52 to 
require that Agency Orders be stopped and executed at or within the 
NBBO and to define when the NBBO will be looked at for purposes of 
order protection during the SAM auction process.\10\
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    \6\ See section E of C2 Rules Chapter 6 relating to Intermarket 
Linkage (``Intermarket Linkage Rule'') (providing that the rules 
contained in section E of CBOE Chapter IV relating to the Options 
Order Protection and Locked/Crossed Market Plan shall apply to C2).
    \7\ Notably, the Exchange's other auction rules expressly 
provide that Initiating Participants must stop Agency Orders at or 
within the NBBO and prohibit Agency Orders from being executed 
against solicited orders at prices outside the NBBO. See Rule 
6.51(b) (Automated Improvement Mechanism (``AIM'')).
    \8\ See Rule 1.1 (System) (defining the term ``System'' to mean 
``the automated trading system used by the Exchange for the trading 
of options contracts'').
    \9\ SAM auction functionality is not active on C2.
    \10\ Any future activation of SAM will be announced via 
Regulatory Circular prior to activation.
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    Specifically, the Exchange is proposing to amend Rules 6.52(a)(2), 
6.52(b)(1)(A), and 6.52(b)(2)(A)(i) to provide that Agency Orders 
submitted into SAM must be stopped with a solicited order priced at or 
within the national best bid or offer (``NBBO'') as of the time of the 
initiation of the Auction (i.e. the time that the Agency Order is 
received for SAM auction processing in the System) (the ``initial 
auction NBBO'') and that Agency Orders that are submitted for 
electronic execution into SAM must be executed at a price at or better 
than the initial auction NBBO.\11\ Agency Orders paired against 
solicited orders priced outside of the NBBO that are submitted for 
electronic execution into SAM would be rejected by the System and 
cancelled by the Exchange.
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    \11\ The Exchange believes that its proposal to consider the 
NBBO as of the time that the Agency Order is received in the System 
for purposes of the entire auction period (i.e. 1 second) is 
consistent with order protection principles.
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    The Exchange believes that requiring SAM orders to be stopped and 
executed at a price equal to, or better than, the NBBO as of the time 
of receipt of the Agency Order in the OHS is consistent with the 
Exchange's Intermarket Linkage Rule. As proposed, the range of 
permissible crossing prices and executions would be defined based on a 
snapshot of the market at the time when the Agency Order is 
received.\12\ This proposed rule change would thus, make clear that 
although the NBBO may update during the SAM auction response time 
(currently SAM auctions last one second),\13\ the initial auction NBBO 
would be considered the NBBO for SAM auction execution purposes. 
Accordingly, a SAM order execution outside of the NBBO would not 
violate the order protection rules if the execution price were within 
the NBBO that existed when the Agency Order was received in the System. 
The Exchange believes that the proposed rule changes would promote 
consistency within the Rules and across the Exchange's various auction 
procedures.\14\ The Exchange also believes that the proposed rule 
changes would further the interests of investors and market 
participants by helping to ensure best executions and protection of 
bids and offers across multiple exchanges.
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    \12\ See Id.
    \13\ See Rule 6.52(b)(1)(C).
    \14\ The Exchange also notes that the proposed order protection 
rule changes are consistent with similar electronic price 
improvement auction rules of other exchanges. See, e.g., BOX Rule 
7270(b)(2)(i) (Block Trades).
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    The following example demonstrates how the Exchange's proposal 
would provide order protection within the context of the SAM auction 
rules. Assume that the NBBO for a particular option is $1.00-$1.20 with 
quotes on both sides for 100 contracts each. The C2 BBO is $0.95-$1.25. 
The minimum increment in the class is $0.01. An Initiating Participant 
submits an Agency Order to buy 500 contracts against a solicited order 
to sell 500 contracts into SAM priced at $1.21. An RFR is transmitted 
to Participants that have elected to receive auction messages without 
any response. In this case, under current Rule 6.52(b)(2)(A), the 
Agency Order would be executable against the solicited order because 
the execution price of $1.21 improves the C2 best offer price of $1.25. 
Such execution, however, would be in violation of the Exchange's order 
protection rules because the Agency Order would have been executed 
outside of the NBBO of $1.00-$1.20. The Exchange proposes to remedy 
this inconsistency in the Rules by changing references to the BBO to 
NBBO and defining the term ``initial auction NBBO'' to mean priced at 
or within the NBBO as of the time of the initiation of the Auction 
(i.e., the time that the Agency Order is received in the System). Under 
the Exchange's proposal, the Agency Order would be rejected by the 
System and cancelled by the Exchange because, at the time when the 
Agency Order to buy 500 contracts priced at $1.21 was received in the 
System, the solicited order would have been outside of the NBBO of 
$1.00-$1.20.
    The Exchange's proposal would not, however, change the priority of 
public customer orders resting in the book. Assume again that the NBBO 
for a particular option is $1.00-$1.20 with quotes on both sides for 
100 contracts each. Assume this time, however, that there is also a 
public customer order to sell 50 contracts resting in the book at 
$1.20. The C2 BBO is $0.95-$1.20. An Initiating Participant submits an 
Agency Order to buy 500 contracts against a solicited order to sell 500 
contracts into SAM priced at $1.20. An RFR is transmitted to 
Participants that have elected to receive auction messages with a 
single response to sell 150 contracts also at $1.20. In this case, 
under both current Rule 6.52(b)(2)(A) and the Exchange's proposed rule 
change, both the Agency Order and solicited order would be cancelled 
because there is a public customer order resting in the book on the 
opposite side of the Agency Order at the proposed price without 
sufficient size (considering all resting orders (i.e. 50), electronic 
quotes (i.e. 100), and responses (i.e. 150) (50 + 100 + 150 = 
300)).\15\
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    \15\ See Rule 6.52(b)(2)(A). Note, however, that in this 
example, under both the current and proposed rules, had the resting 
order in the book to sell 50 contracts at $1.20 been a Market-Maker 
quote or order rather than a public customer order, the Agency Order 
to buy 500 contracts would trade against the solicited order at 
$1.20 because there would not have been a public customer order in 
the book on the opposite side of the Agency Order and there would 
have been insufficient size to execute the Agency Order at a price 
equal to, or better than, the initial auction NBBO. See Rules 
6.52(b)(2)(A)(ii)-(iii).
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    The Exchange also proposes to amend Rules 6.52(b)(1)(B) to further 
make clear that upon receiving a properly designated Agency Order for 
SAM Auction processing, the Exchange's RFR message would indicate the 
price, side, and size of the Agency Order that the Initiating 
Participant is seeking to cross. Rule 6.52(b)(1)(B) currently provides 
that the Exchange will send an RFR message to all Participants that 
have elected to receive such messages, indicating the price and size of 
the Agency Order that the Initiating Participant is seeking to cross, 
but does not currently specify that the RFR will also indicate the side 
(i.e. buy v. sell) of the Agency Order that the Initiating Participant 
is seeking to cross.\16\ In order to add additional clarity to the 
Rules and in an effort to minimize confusion among market participants, 
the Exchange proposes to add the ``side'' indication requirement to the 
SAM auction rules. The Exchange believes that the proposed changes will 
provide additional clarity regarding the Exchange's SAM auction 
processes and reduce the potential for confusion in the Rules.
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    \16\ The Exchange's other auction rules require the side of the 
Agency Order to be indicated in the RFR. See, e.g., Rule 
6.51(b)(1)(B), Automated Improvement Mechanism, which provides that 
the Initiating Participant must expressly disclose the side of the 
Agency Order that it seeks to cross. (``When the Exchange receives a 
properly designated Agency Order for Auction processing, a Request 
for Responses (``RFR'') detailing the side and size of the order 
will be sent to all Participants that have elected to receive 
RFRs.'' Emphasis added.)

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[[Page 33000]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of section 6(b) of the 
Act.\17\ Specifically, the Exchange believes the proposed rule change 
is consistent with the section 6(b)(5) \18\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the section 6(b)(5) \19\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    In particular, the Exchange believes that the proposed changes 
would ensure further consistency within the Exchange's Rules. The 
Exchange also believes that the proposed rule changes would further the 
objectives of the Act to protect investors by promoting the intermarket 
price protection goals of the Exchange's order protection rules and the 
Options Order Protection and Locked/Crossed Market Plan.\20\ The 
Exchange believes its proposal would help ensure intermarket 
competition across all exchanges, aid in preventing intermarket trade-
throughs, and facilitate compliance with best execution practices. The 
Exchange believes that these objectives are consistent with the Act and 
the rules and regulations thereunder applicable to the Exchange and, in 
particular, the requirements of section 11A of the Act. In addition, 
the Exchange believes that the proposed rule changes will clarify the 
manner in which orders are submitted into the SAM auction process and 
reduce the potential for confusion in the Rules. The Exchange believes 
that providing additional clarity to its Rules furthers the goal of 
promoting transparency in markets, which is in the best interests of 
market participants and the general public and consistent with the Act.
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    \20\ See generally File No. 4-546: Proposed Options Order 
Protection and Locked/Crossed Market Plan by BSE, CBOE, ISE, Nasdaq, 
NYSE Arca, NYSEALTR, and Phlx; File No. 4-546: Amendment No. 1 to 
Proposed Options Order Protection and Locked/Crossed Market Plan by 
CBOE (Nov. 21, 2008); see also Securities and Exchange Act Release 
No. 34-43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (Order 
Approving Options Intermarket Linkage Plan) (File No. 4-429).
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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 the purposes of the Act. Rather, the Exchange 
believes that the proposed rule would bolster intermarket competition 
by promoting fair competition among individual markets, while at the 
same time assuring that market participants receive the benefits of 
markets that are linked together, through facilities and rules, in a 
unified system, which promotes interaction among the orders of buyers 
and sellers. The Exchange believes its proposal would help ensure 
intermarket competition across all exchanges, aid in preventing 
intermarket trade-throughs, and facilitate compliance with best 
execution practices. In addition, the Exchange believes that the 
proposed rule change would help promote fair and orderly markets by 
helping to ensure compliance with the order protection rules. Thus, the 
Exchange does not believe the proposal creates any significant impact 
on competition.

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 written 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:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \21\ and 
Rule 19b-4(f)(6) \22\ thereunder.
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such short time as designated by the Commission. The 
Exchange has satisfied this requirement.
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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. 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-C2-2015-014 on the subject line.

Paper comments

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

All submissions should refer to File Number SR-C2-2015-014. 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/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from

[[Page 33001]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-C2-
2015-014 and should be submitted on or before July 1, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-14133 Filed 6-9-15; 8:45 am]
 BILLING CODE 8011-01-P