[Federal Register Volume 76, Number 232 (Friday, December 2, 2011)]
[Notices]
[Pages 75582-75584]
[FR Doc No: 2011-30995]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65834; File No. SR-C2-2011-033]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Market-Makers' Continuous Quoting Obligations and Adjusted
Option Series

November 28, 2011.
    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 18, 2011, the 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 Exchange filed the proposal as a ``non-controversial''
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 Rules 8.5 and 8.13 to indicate that
Market-Makers will not be obligated to maintain continuous quotes in
adjusted option series and to define the term adjusted option
series.\5\ 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's Public
Reference Room.
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    \5\ In addition, to ensure that Market-Makers will continue to
be obligated to quote in adjusted option series if and when the need
arises, the proposed rule change adds Rule 8.5(d) to provide that a
Market-Maker may be called upon by an Exchange official designated
by the Board of Directors to submit a single quote or maintain
continuous quotes in one or more series of a class to which the
Market-Maker is appointed whenever, in the judgment of such
official, it is necessary to do so in the interest of maintaining a
fair and orderly market.
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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 those 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 parts of such
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend Rules 8.5,
``Obligations of Market-Makers,'' and 8.13, ``Preferred Market-Maker
Program,'' to indicate that Market-Makers will not be obligated to
maintain continuous quotes in adjusted option series and to define the
term adjusted option series. The proposal is based on recent rule
changes of NYSE Amex LLC (``NYSE Amex''), NYSE Arca, Inc. (``NYSE
Arca'') and NASDAQ OMX PHLX, Inc. (``PHLX'').\6\
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    \6\ See Securities Exchange Act Release Nos. 65572 (October 14,
2011), 76 FR 65310 (October 20, 2011) (SR-NYSEAmex-2011-61) (order
granting approval of proposed rule change concerning market maker
continuous quoting obligations and adjusted option series); 65573
(October 14, 2011), 76 FR 65305 (October 20, 2011) (SR-NYSEArca-
2011-59) (order granting approval of proposed rule change concerning
market maker continuous quoting obligations and adjusted option
series); and 61095 (December 2, 2009), 74 FR 64786 (December 8, 2009
(SR-PHLX-2009-99).
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    Rule 8.5(a)(1) currently provides that during trading hours, a
Market-Maker must maintain a continuous two-sided market in 60% of the
series of each registered class that have a time to expiration of less
than nine months. For purposes of that obligation, ``continuous'' means
99% of the time.\7\ Rule 8.13(d) currently provides that a Preferred
Market-Maker \8\ (Market-

Makers and Preferred Market-Makers collectively referred to as
``Market-Makers'' in this filing) must comply with the quoting
obligations applicable under Exchange rules and must provide continuous
quotes in at least 90% of the series of each class for which it
receives Preferred Market-Maker orders.
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    \7\ The rule also provides that if a technical failure or
limitation of the Exchange's system prevents a Market-Maker from
maintaining, or from communicating to the Exchange, timely and
accurate quotes in a series, the duration of such failure will not
be considered in determining whether that Market-Maker has satisfied
the 99% quoting standard with respect to that series. The Exchange
may consider other exceptions to this obligation based on
demonstrated legal or regulatory requirements or other mitigating
circumstances.
    \8\ Rule 8.13(a) provides that the Exchange may allow, on a
class-by-class basis, for the receipt of marketable orders, through
the Exchange's system when the Exchange's disseminated quote is the
national best bid or offer, that carry a designation from the member
transmitting the order that specifies a Market-Maker in that class
as the ``Preferred Market-Maker'' for that order.
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    The Exchange proposes to relieve Market-Makers of the obligation to
maintain continuous quotes in adjusted option series. The proposal
amends the rules discussed above that impose continuous quoting
obligations on Market-Makers to provide that such quoting obligations
only apply to non-adjusted option series. The proposal defines
``adjusted option series'' as an option series for which, as a result
of a corporate action by the issuer of the security underlying such
option series, one option contract in the series represents the
delivery of other than 100 shares of underlying stock or Units.\9\
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    \9\ ``Units'' are securities other than shares that are traded
on a national securities exchange and are defined as an ``NMS
stock'' under Rule 600 of Regulation NMS and that meet the other
requirements set forth in Rule 5.3, Interpretation and Policy .06.
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    After a corporate action and a subsequent adjustment to the
existing options, the series in question are identified by the Options
Price Reporting Authority and at the Options Clearing Corporation with
a separate symbol consisting of the underlying symbol and a numerical
appendage. As a standard procedure, exchanges listing options on an
underlying security that undergoes a corporate action resulting in
adjusted series will list new standard option series across all
appropriate expiration months the day after the existing series are
adjusted. The adjusted series are generally actively traded for a short
period of time following adjustment, but orders to open options
positions in the underlying security are almost exclusively placed in
the new standard option series contracts. Although the adjusted series
may not expire for a long period of time, in a short time the adjusted
series are no longer actively traded. Thus, the burden of quoting these
series generally outweighs the benefit of being appointed in the class
because of the lack of interest in the series by various market
participants.
    The Exchange notes that other options exchanges have indicated that
market-makers have recently withdrawn from assignments in classes that
include adjusted series, resulting in a reduction in liquidity in these
classes. These market-makers informed the exchanges that the
withdrawals were based in part on their obligation to continuously
quote adjusted option series, and the quoting obligations on these
often less frequently traded option series impacted the risk parameters
acceptable to the market-makers. These options exchanges also noted
that market-makers also expressed concern that the adjusted nature of
these series complicates the calculation of an appropriate quote. As a
result of withdrawals from such assignments by market-makers, these
options exchanges stated that liquidity, as well as volume, had been
negatively impacted in the affected options classes listed on the
exchanges.\10\ The Exchange believes that this proposal will prevent
any similar withdrawals by C2 Market-Makers from assignments in classes
that include adjusted option series on the Exchange, and thus any
potential reduction in liquidity and volume related to the withdrawals,
and encourage Market-Makers to continue their appointments in these
option classes.
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    \10\ See supra note 6.
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    In support of this proposal, the Exchange notes that this proposed
rule change is similar to recent rule changes of NYSE Amex, NYSE Arca
and PHLX.\11\ The Exchange is merely proposing to exclude adjusted
option series from Market-Makers' continuous quoting obligations, but
not from other obligations imposed on Market-Makers pursuant to Rules
8.5 and 8.13. In addition, to ensure that Market-Makers will continue
to be obligated to quote in adjusted option series if and when the need
arises, the proposed rule change adds Rule 8.5(d) to provide that a
Market-Maker may be called upon by an Exchange official designated by
the Board of Directors to submit a single quote or maintain continuous
quotes in one or more series of a class to which the Market-Maker is
appointed whenever, in the judgment of such official, it is necessary
to do so in the interest of maintaining a fair and orderly market.\12\
For example, in the event of a large market order imbalance in a
particular series, and the Market-Makers currently quoting in that
series are not able to provide sufficient liquidity to fulfill the full
size of the orders, an Exchange official may call upon a Market-Maker
to maintain continuous quotes in such series until the imbalance is
resolved.
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    \11\ Id.
    \12\ The duration for which a Market-Maker must maintain
continuous quotes if called upon by an Exchange official pursuant to
new Rule 8.5(d) would depend on the facts and circumstances that
prompted the Exchange official to make such a request, and therefore
could last anywhere from a few minutes to the remainder of the
trading day. This new Rule 8.5(d) is based on a similar provision in
CBOE Rule 8.7(d)(iv).
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    The current quoting obligation in these illiquid adjusted option
series is a minor part of a Market-Maker's overall obligation, and the
proposed relief is mitigated by a Market-Maker's obligation to respond
to a request for quote by a Trading Permit Holder. Because of the lack
of interest in these adjusted option series, there is little
demonstrable benefit to being a Market-Maker in them other than the
ability to maintain Market-Maker margins for what little activity may
occur. In addition, the burden of continuous quoting in these series is
counter to the Exchange's efforts to mitigate the number of quotes
collected and disseminated.
    The Exchange believes that the proposed rule change should incent
Market-Makers to continue appointments, and as a result expand
liquidity, in options classes listed on the Exchange to the benefit of
the Exchange and its Trading Permit Holders and public customers. The
Exchange believes that its Market-Makers would be disadvantaged if they
are required to continuously quote in these illiquid adjusted option
series, and the Exchange's Trading Permit Holders and public customers
would also be disadvantaged if Market-Makers withdrew from appointments
in options classes that include adjusted option series, resulting in
reduced liquidity and volume in these classes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
Section 6 of the Act \13\ and the rules and regulations thereunder and,
in particular, the requirements of Section 6(b) of the Act.\14\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \15\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, 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.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes this proposed rule change is
consistent with the Act because, on balance, the elimination of the
continuous quoting obligations in adjusted option series is

a minor change and should not impact the quality of C2's trading
market. Among other things, adjusted option series are not common, and
trading interest is often very low after the corporate event has
passed. Consequently, continuous quotes in these series increase quote
traffic and burdens systems without a corresponding benefit. By not
requiring Market-Makers to provide continuous quotes in these series,
the Exchange's proposal would further its goal of measured quote
mitigation. Further, while they will not be tasked with providing
continuous quotes in these series, Market-Makers must still quote these
series when requested by an Exchange official. Accordingly, the
proposal supports the quality of C2's trading market by helping to
ensure that Market-Makers will continue to be obligated to quote in
adjusted option series if and when the need arises.
    These changes are consistent with the rules of competing options
exchanges, and they serve to remove impediments to and to perfect the
mechanism for a free and open market and a national market system.

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 not necessary or appropriate in furtherance of
the purposes of the Act. In this regard, and as indicated above, the
Exchange notes that the rule change is being proposed as a competitive
response to recent rule changes of NYSE Amex, NYSE Arca and PHLX.\16\
C2 believes this proposed rule change is necessary to permit fair
competition among the options exchanges with respect to Market-Makers'
continuous quoting obligations.
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    \16\ See supra note 6.
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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

    Because the 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 if consistent with the protection of investors
and the public interest, provided that the self-regulatory organization
has given 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 shorter time as designated
by the Commission, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6)
\18\ thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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 shorter 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 such 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_ADDRESS>Please include
File Number SR-C2-2011-033 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-C2-2011-033. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-C2-2011-033 and should be
submitted on or before December 23, 2011.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30995 Filed 12-1-11; 8:45 am]
BILLING CODE 8011-01-P