Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange is proposing to amend its rules to (i) address the authority of the Exchange to cancel orders (or release routing-related orders) when a technical or systems issue occurs; and (ii) describe the operation of an Exchange error account(s) and routing broker error account(s), which may be used to liquidate unmatched executions that may occur in the provision of the Exchange's routing service. The text of the rule proposal is available on the Exchange's Web site (
In its filing with the Commission, the self-regulatory organization 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.
The purpose of the proposed rule change is to adopt new Rule 6.47 to address the authority of the Exchange to cancel orders (or release routing-related orders) when a technical or systems issue occurs and to adopt new Rule 6.37
By way of background, C2 operates a system of trading that allows automatic executions to occur electronically. As part of this infrastructure, C2 also automatically routes orders to other exchanges under certain circumstances. These routing services are provided in conjunction with one or more routing brokers that are not affiliated with the Exchange.
In the normal course, the routing broker reports an execution or cancellation of the routed order back to the Exchange. Routed orders that are executed at another exchange are submitted for clearance and settlement in the name of the routing broker. The routing broker then coordinates with the Exchange to arrange for any resulting securities positions to be delivered to the TPH that submitted the original order to the Exchange (
From time to time, the Exchange encounters situations in which it becomes necessary to cancel orders (or release routing-related orders) and resolve error positions that result from errors of the Exchange, routing brokers, or another exchange.
The Exchange proposes to adopt new C2 Rule 6.47 to address the authority of the Exchange to cancel orders when a technical or systems issue occurs. Specifically, paragraph (a) of the proposed rule would expressly authorize the Exchange to cancel orders as it deems to be necessary to maintain fair and orderly markets if a technical or systems issue occurs at the Exchange,
Paragraph (b) of the proposed rule provides that the Exchange may also determine to release orders being held on the Exchange awaiting an away exchange execution as it deems to be necessary to maintain fair and orderly markets if a technical or systems issues occurs at the Exchange, a routing broker, or another exchange to which an order has been routed (the process for "releasing" orders is illustrated in more detail below). Paragraph (c) of the proposed rule would provide that, for purposes of Rule 6.47, technical or system issues
The examples set forth below describe some of the circumstances in which the Exchange may decide to cancel (or release) orders.
Proposed Rule 6.37 would provide that each routing broker shall maintain, in the name of the routing broker, one or more accounts for the purpose of liquidating unmatched trade positions that may occur in connection with the away exchange routing service provided under Rule 6.36 ("error positions").
Paragraph (a) of the proposed rule would provide that errors to which the rule would apply include any action or omission by the Exchange, a routing broker, or another exchange to which an Exchange order has been routed, either of which result in an unmatched trade position due to the execution of an original or corresponding order that is subject to the away market routing service and for which there is no corresponding order to pair with the execution (each a "routing error"). Such routing errors would include, without limitation, positions resulting from determinations by the Exchange to cancel or release an order pursuant to proposed Rule 6.47 (as described above).
Paragraph (b) of the proposed rule would provide that, generally, each routing broker will utilize its own error account to liquidate error positions. However, in certain circumstances, the Exchange may utilize an Exchange Error Account. In particular, in instances where the routing broker is unable to utilize its own error account (
The Exchange believes it is reasonable and appropriate to address routing errors through the error account of a routing broker in the manner proposed because, among other reasons, it is the executing broker associated with these transactions. The Exchange also believes that having the flexibility to determine to utilize an Exchange Error Account in the limited circumstances described above allows for administrative convenience and contributes to the Exchange's ability to maintain a fair and orderly market.
By definition, an error position in an Exchange Error Account would only include unmatched trades due to a routing error. In that regard, paragraph (c) of the proposed rule would provide that the Exchange shall not accept any positions in an Exchange Error Account from an account of a Trading Permit Holder or permit any Trading Permit Holder to transfer any positions from the Trading Permit Holder's account to an Exchange Error Account.
To the extent a routing broker utilizes its own account to liquidate error positions, paragraph (d) of the proposed rule provides that the routing broker shall liquidate the error positions as soon as practicable. The routing broker could determine to liquidate the position itself or have a third party broker-dealer liquidate the position on the routing broker's behalf. Paragraph (d) also provides that the routing broker establish and enforce policies and procedures reasonably designed to (i) adequately restrict the flow confidential and proprietary information associated with the liquidation of the error position
Paragraph (e) of the proposed rule would provide that, to the extent an Exchange Error Account is utilized to liquidate error positions, the Exchange shall liquidate the error positions as soon as practicable. In liquidating error positions in an Exchange Error Account, the Exchange shall provide complete time and price discretion for the trading to liquidate error positions in an Exchange Error Account to a third-party broker-dealer and shall not attempt to exercise any influence or control over the timing or methods of such trading.
Examples of such error positions due to a routing error may include, without limitation, the following:
In each of the circumstances described above, the Exchange and its routing broker may not learn about an error position until T+1. For instance, the Exchange and its routing broker may not learn about an error position until either (i) during the clearing process when a routing destination has submitted to The Options Clearing Corporation ("OCC") a transaction for clearance and settlement for which the Exchange/routing broker never received an execution confirmation, or (ii) when another exchange does not recognize a transaction submitted by a routing broker to OCC for clearance and settlement. Moreover, the affected TPHs' trade may not be nullified absent express authority under Exchange Rules.
The proposed rule change is consistent with Section 6(b) of the Act
The Exchange 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.
The Exchange neither solicited nor received comments on the proposal.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
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:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.