[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43032-43034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16325]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50005; File No. SR-CBOE-2004-33]
Self-Regulatory Organizations; Order Granting Accelerated
Approval of Proposed Rule Change by the Chicago Board Options Exchange,
Inc. and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 Thereto Relating to Frequency of Executions on the
Hybrid Trading System
July 12, 2004.
I. Introduction
On May 19, 2004, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change governing the frequency with which orders for the
account of market makers or specialists on an options exchange
(``options market maker''), or for the account of a stock exchange
specialist with respect to a security in which it acts as specialist,
may be submitted for automatic execution in the Exchange's Hybrid
Trading System (``Hybrid''). The proposed rule change was published in
the Federal Register on June 14, 2004.\3\ On July 12, 2004, the
Exchange submitted by facsimile Amendment No. 1 to the proposal.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 49814 (June 4,
2004), 69 FR 33090.
\4\ See letter from Steve Youhn, Senior Attorney, Legal
Division, CBOE, to Nancy J. Sanow, Assistant Director, Division of
Market Regulation (``Division''), Commission, dated July 12, 2004
(``Amendment No. 1'').
---------------------------------------------------------------------------
The Commission received no comments on the proposed rule change.
This order approves the proposed rule change on an accelerated basis.
Simultaneously, the Commission provides notice of filing and grants
accelerated approval of Amendment No. 1.
II. Description of Proposal and Amendment No. 1
Currently, CBOE Rule 6.8(e)(iii) restricts the entry of certain
orders into the Exchange's RAES system to one order within any 15-
second period on the same side of the market in an option class, when
such order is for an account or accounts of the same beneficial owner.
The proposed rule change seeks to adopt a similar 15-second rule
applicable to options market maker and stock exchange specialist orders
entered into Hybrid, which would be implemented for a six-month pilot
period.
Specifically, the Exchange has proposed to adopt new CBOE Rule
6.13(b)(i)(C)(iii), which would prohibit members from entering or
permitting the entry of multiple orders on the same side of the market
in an option class within any 15-second period for an account or
accounts of the same beneficial owner with respect to those orders
eligible for submission pursuant to CBOE Rule 6.13(b)(i)(C)(ii).\5\ The
proposed rule change also would allow the appropriate floor procedure
committee (``FPC'') to shorten the duration of this 15-second
restriction by providing advance notice to the membership via a
Regulatory Circular that is issued at least one day prior to
implementation.
---------------------------------------------------------------------------
\5\ See infra note 6.
---------------------------------------------------------------------------
The Exchange also has proposed to limit to the scope of the rule.
The Exchange has represented that while all of the floor-based options
exchanges' rules, including CBOE Rule 6.8(e)(iii), broadly apply to all
orders (i.e., orders from customers and broker-dealers), the proposed
amendment to CBOE Rule 6.13 will apply only to orders from options
exchange market makers and stock exchange specialists, as defined in
CBOE Rule 6.13(b)(i)(C)(ii).\6\ According to the Exchange, customers
and broker-dealers (as described in CBOE Rule 6.13(b)(i)(C)(i)) will
not be subject to the rule and as such will continue to be eligible to
receive unlimited automatic executions.
---------------------------------------------------------------------------
\6\ On June 17, 2004, the Commission approved a proposed rule
change that modified this paragraph. See Securities Exchange Act
Release No. 49880, 69 FR 35086 (June 23, 2004) (SR-CBOE-2004-15).
CBOE Rule 6.13(b)(i)(C)(ii) currently provides as follows:
(ii) (A) Options Exchange Market Makers: The appropriate FPC may
also determine, on a class-by-class basis, to allow orders for the
accounts of market makers or specialists on an options exchange
(collectively ``options market makers'') who are exempt from the
provisions of Regulation T of the Federal Reserve Board pursuant to
Section 7(c)(2) of the Securities Exchange Act of 1934 to be
eligible for automatic execution. The appropriate FPC may establish
the maximum order size eligibility for such options market maker
orders at a level lower than the maximum order size eligibility
available to non-broker-dealer public customers and non-market maker
or non-specialist broker-dealers. Pronouncements pursuant to this
provision regarding options market maker access shall be made by the
appropriate FPC and announced via Regulatory Circular.
(B) Stock Exchange Specialists: The appropriate FPC may
determine, on a class-by-class basis, to allow orders for the
account of a stock exchange specialist, with respect to a security
in which it acts as a specialist, to be eligible for automatic
execution in the overlying option class. The appropriate FPC may
establish the maximum order size eligibility for such specialist
orders at a level lower than the maximum order size eligibility
available to options exchange market makers. Stock exchange
specialists, with respect to orders in securities in which they do
not act as specialist, will be treated as broker-dealers that are
not market makers or specialists on an options exchange and will be
eligible to submit orders for automatic execution in accordance with
subparagraph (i) above.
---------------------------------------------------------------------------
The Exchange clarified the scope of the proposed rule change in
Amendment No. 1. Amendment No. 1 confirmed that Linkage Orders will not
be subject to the proposed rule. Moreover, Amendment No. 1 proposed to
amend the rule text to clarify the type of orders that will be presumed
to be for the account(s) of the same beneficial owner. Specifically,
the Exchange proposed that orders will be presumed to be for the
account(s) of the same beneficial owner if they are not independently
originated by separate market makers (or stock exchange specialists)
and such orders clear into the same account or accounts with common
ownership. The Exchange also included language that explained that the
term ``independently originated'' means that a market maker (or stock
exchange specialist) makes an individual determination to trade and
separately communicates its trading determination (i.e., order) to the
Exchange.
Also in Amendment No. 1, the Exchange made representations
regarding its members' ability to comply with the proposed rule. In
this regard, the Exchange stated that it had contacted the large
national market making firms, as well as the primary vendors used by
the majority of market makers to submit quotes and orders, to gauge
their ability to comply with the proposed rule. CBOE represented that,
based on those discussions, it has determined that its members would be
able to enforce compliance with the
[[Page 43033]]
proposed rule upon implementation either through electronic or manual
means.
Lastly, in Amendment No. 1, the Exchange requested approval of the
proposed rule change for a six-month pilot period.
III. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.\7\ Specifically, the Commission believes the
proposed rule change is consistent with section 6(b)(5) of the Act,\8\
which requires among other things, that the rules of the 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 perfect the
mechanism of a free and open market and national market system, and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------
\7\ The Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission believes that prohibiting members from causing the
entry of more than one order from options market makers or stock
exchange specialists for the same beneficial account within a 15-second
period into Hybrid should help reduce the risk exposure of CBOE market
makers. The Commission believes that 15 seconds is a sufficient time
period to allow market makers to change their quotations following an
execution, without placing an undue burden on market participants
seeking to execute transactions on the Exchange.\9\ The Commission
notes, however, that market participants subject to the 15-second
restriction will still be permitted to send orders to the Exchange for
execution through the Intermarket Options Linkage pursuant to the terms
of the Plan for the Purpose of Creating and Operating an Intermarket
Options Linkage.
---------------------------------------------------------------------------
\9\ The Commission notes that the Exchange may not take punitive
action against any non-member options market marker or stock
exchange specialist who submits an order to a CBOE member for entry
into Hybrid in the event that the CBOE member violates CBOE Rule
6.13(b)(i)(C)(iii).
---------------------------------------------------------------------------
The Commission finds good cause for approving the proposed rule
change prior to the 30th day of the date of publication of notice of
filing thereof in the Federal Register. The Exchange has represented
that, upon approval of the proposed rule change, orders electronically
submitted to CBOE's order routing system in Hybrid classes by options
market-makers will be eligible for automatic execution through the
Hybrid System.\10\ The Commission believes that permitting such access
is an important development in that it will improve the efficiency with
which such orders will be executed. By providing efficient executions
for additional types of orders, more options orders may be attracted to
the Exchange, and thus help improve the depth and liquidity of the
Exchange's market.
---------------------------------------------------------------------------
\10\ See letter from Joanne Moffic-Silver, General Counsel,
CBOE, to Annette Nazareth, Director, Division, Commission, dated
July 9, 2004.
---------------------------------------------------------------------------
Further, the Exchange is proposing to implement the proposed rule
change for a pilot period of six months so that the Exchange and the
Commission may review the impact of the proposed rule change in light
of greater options market maker access to Hybrid. Therefore, the
Commission finds that there is good cause, consistent with section
19(b)(2) of the Act,\11\ to approve the proposed rule change on an
accelerated basis.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the 30th day after the date of
publication of notice of filing thereof in the Federal Register. In
Amendment No. 1, the Exchange proposed to revise the rule text to
provide greater clarity with respect to the definition of beneficial
owner. The Exchange also proposed to implement the proposed rule change
as a six-month pilot program and clarified that the proposed rule
change would not affect the frequency with which markets may submit
Linkage Orders to the CBOE. Because Amendment No. 1 did not affect the
substance of the proposed rule change, made clarifying changes to the
scope of the proposal, and proposed that the new rule be operated on a
pilot basis, the Commission finds good cause, consistent with section
19(b)(2) of the Act, to approve Amendment No. 1 on an accelerated
basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1 to the proposed rule change,
including whether the Amendment 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 e-mail to [email protected]. Please include
SR-CBOE-2004-33 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to SR-CBOE-2004-33. 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 inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of the CBOE. 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 SR-CBOE-2004-33 and should be submitted on
or before August 9, 2004.
V. Conclusion
Is it therefore ordered, pursuant to section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-CBOE-2004-33) and Amendment
No. 1 thereto are hereby approved on an accelerated basis for a pilot
period to expire on January 12, 2005.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
[[Page 43034]]
---------------------------------------------------------------------------
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16325 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P