

[Federal Register: September 30, 2005 (Volume 70, Number 189)]
[Notices]               
[Page 57340-57345]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se05-160]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52506; File No. SR-CBOE-2005-58]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
to a Proposed Rule Change Relating to the Exchange's Preferred 
Designated Primary Market-Maker Program

September 23, 2005.
    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 July 27, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. In addition, the 
Commission is granting accelerated approval of the proposed rule 
change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The CBOE proposes to amend its rules governing its Preferred 
Designated Primary Market-Maker (``DPM'') program to allow non-DPM 
Market-Makers to receive orders designated for a specific Market-Maker 
(``Preferred orders'').\3\ Proposed new language is in italics; 
proposed deletions are in [brackets].
---------------------------------------------------------------------------

    \3\ With the permission of the CBOE, the Commission made 
clarifications to the description of the proposed rule change as 
noted herein. Telephone conversation between David Hsu, Special 
Counsel, Theodore Venuti, Attorney, Division of Market Regulation, 
Commission, and Angelo Evangelou, Senior Managing Attorney, CBOE, on 
August 11, 2005.
---------------------------------------------------------------------------

* * * * *
Rule 8.13 Preferred Market-Maker Program
    (a) Generally. The Exchange may allow, on a class-by-class basis, 
for the receipt of marketable orders, through the Exchange's Order 
Routing System when the Exchange's disseminated quote is the NBBO, 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. A qualifying recipient of a Preferred Market-
Maker order shall be afforded a participation entitlement as set forth 
in subparagraph (c) below. The Preferred Market-Maker Program shall be 
in effect until June 2, 2006 on a pilot basis.
    (b) Eligibility. Any Exchange Market-Maker type (e.g., Remote 
Market-Maker, Lead Market-Maker, and Designated Primary Market-Maker) 
may be designated as a Preferred Market-Maker, however, a recipient of 
a Preferred Market-Maker order will only receive a participation 
entitlement for such order if the following provisions are met:
    (i) The Preferred Market-Maker must have an appointment/allocation 
in the relevant option class.
    (ii) The Preferred Market-Maker must be quoting at the best bid/
offer on the Exchange.
    (iii) The Preferred Market-Maker must comply with the quoting 
obligations applicable to its Market-Maker type under Exchange rules 
and must provide continuous two-sided quotations in at least 90% of the 
series of each class for which it receives Preferred Market Maker 
orders.
    (c) Entitlement Rate. Provided the provisions of subparagraph (b) 
above have been met, the Preferred Market-Maker participation 
entitlement shall be 40% when there are two or more Market-Makers also 
quoting at the best bid/offer on the Exchange, and 50% when there is 
only one other Market-Maker quoting at the best bid/offer on the 
Exchange. In addition, the following shall apply:
    (i) A Preferred Market-Maker may not be allocated a total quantity 
greater than the quantity that the Preferred Market-Maker is quoting at 
the best bid/offer on the Exchange.
    (ii) The participation entitlement rate is based on the number of 
contracts remaining after all public customer orders in the book at the 
best bid/offer on the Exchange have been satisfied.
    (iii) If a Preferred Market-Maker receives a participation 
entitlement under this Rule, then no other participation entitlements 
set forth in Exchange Rules (e.g., Rule 8.87 Participation Entitlement 
of DPMs and e-DPMs and Rule 8.15B Participation Entitlement of LMMs) 
shall apply to such order.
* * * * *
Rule 6.45A.--Priority and Allocation of Equity Option Trades on the 
CBOE Hybrid System
    Generally: The rules of priority and order allocation procedures 
set forth in this rule shall apply only to equity option classes 
designated by the Exchange to be traded on the CBOE Hybrid System and 
has no applicability to index option and options on ETF classes. The 
term ``market participant'' as used throughout this rule refers to a 
Market-Maker, an in-crowd DPM, an e-DPM, a Remote Market-Maker, and a 
floor broker representing orders in the trading crowd. The term ``in-
crowd market participant'' only includes an in-crowd Market-Maker, in-
crowd DPM, and floor broker representing orders in the trading crowd.
    (a) Allocation of Incoming Electronic Orders: The Exchange shall 
apply, for each class of options, the following rules of trading 
priority.
    (i) Ultimate Matching Algorithm (``UMA''): Under this method, a 
market participant who enters a quotation or order and whose quote or 
order is represented by the disseminated CBOE best bid or offer 
(``BBO'') shall be eligible to receive allocations of incoming 
electronic orders for up to the size of its quote or order, in 
accordance with the principles described below. As an initial matter, 
if the number of contracts represented in the disseminated quote is 
less than the

[[Page 57341]]

number of contracts in an incoming electronic order(s), the incoming 
electronic order(s) shall only be entitled to receive a number of 
contracts up to the size of the disseminated quote, in accordance with 
Rule 6.45A(a)(i)(B). The balance of the electronic order will be 
eligible to be filled at the refreshed quote either electronically (in 
accordance with paragraph (a)(i)(B) below) or manually (in accordance 
with Rule 6.45A(b)) and, as such, may receive a split price execution.
(A) Priority of Orders in the Electronic Book
    (1) Public Customer Orders: Public customer orders in the 
electronic book have priority. Multiple public customer orders in the 
electronic book at the same price are ranked based on time priority. If 
a public customer order(s) in the electronic book matches, or is 
matched by, a market participant quote, the public customer order(s) 
shall have priority and, the balance of the incoming order, if any, 
will be allocated pursuant to Rule 6.45A(a)(i)(B).
    (2) Broker-dealer Orders: If pursuant to Rule 7.4(a) the 
appropriate FPC determines to allow certain types of broker-dealer 
orders to be placed in the electronic book, then for purposes of this 
rule, the cumulative number of broker-dealer orders in the electronic 
book at the best price shall be deemed one ``market participant'' 
regardless of the number of broker-dealer orders in the book. The 
allocation due the broker-dealer orders in the electronic book by 
virtue of their being deemed a ``market participant'' shall be 
distributed among each broker-dealer order comprising the ``market 
participant'' pursuant to Rule 6.45A(a)(i)(B).
(B) Allocation
    (1) Market Participant Quoting Alone at BBO: When a market 
participant is quoting alone at the disseminated CBOE BBO and is not 
subsequently matched in the quote by other market participants prior to 
execution, it will be entitled to receive incoming electronic order(s) 
up to the size of its quote. If another market participant joins in the 
disseminated quote prior to execution of an incoming electronic 
order(s) such that more than one market participant is quoting at the 
BBO, incoming electronic order(s) will be distributed in accordance 
with (B)(2) below.
    (2) More than One Market Participant Quoting at BBO: When more than 
one market participant is quoting at the BBO, inbound electronic orders 
shall be allocated pursuant to the following allocation algorithm:

Where:

Component A: The percentage to be used for Component A shall be an 
equal percentage, derived by dividing 100 by the number of market 
participants quoting at the BBO.
[GRAPHIC] [TIFF OMITTED] TN30SE05.034

Component B: Size Prorata Allocation. The percentage to be used for 
Component B of the Allocation Algorithm formula is that percentage that 
the size of each market participant's quote at the best price 
represents relative to the total number of contracts in the 
disseminated quote.
Final Weighting: The final weighting formula for equity options, which 
shall be determined by the appropriate FPC and apply uniformly across 
all options under its jurisdiction, shall be a weighted average of the 
percentages derived for Components A and B multiplied by the size of 
the incoming order. Initially, the weighting of components A and B 
shall be equal, represented mathematically by the formula: ((Component 
A Percentage + Component B Percentage)/2) * incoming order size.

    (C) [DPM] Participation Entitlement: If a [DPM or e-DPM] Market-
Maker is eligible for an allocation pursuant to the operation of the 
Algorithm described in paragraph (a) of Rule 6.45A and is also eligible 
for an allocation pursuant to a participation entitlement under Rules 
8.13, 8.15B, or 8.87, the Market-Maker [DPM or e-DPM] shall be entitled 
to receive an allocation (not to exceed the size of its [the DPM's or 
e-DPM's] quote) equal to either:
    (1) The greater of the amount the Market-Maker [it] would be 
entitled to pursuant to the participation entitlement [right 
established pursuant to Rule 8.87 (and Regulatory Circulars issued 
thereunder)] or the amount it would otherwise receive pursuant to the 
operation of the Algorithm described above provided, however, that in 
calculating a [the] DPM's allocation under the Algorithm, DPMs 
utilizing more than one membership in the trading crowd where the 
subject class is traded shall count as two market participants for 
purposes of Component A of the Algorithm; or
    (2) The amount the Market-Maker [it] would be entitled to pursuant 
to the participation entitlement. [right established pursuant to Rule 
8.87 (and Regulatory Circulars issued thereunder).]
    The appropriate FPC shall determine which of the preceding two 
entitlement formulas will be in effect for all classes under its 
jurisdiction. All pronouncements regarding the entitlement formula 
shall be made via Regulatory Circular. The participation entitlement 
percentage is expressed as a percentage of the remaining quantity after 
all public customer orders in the electronic book have been executed.
    (b)-(e) No change.
    * * * Interpretations and Policies:
    .01-.02. No change.
* * * * *
Rule 6.45B--Priority and Allocation of Trades in Index Options and 
Options on ETFs on the CBOE Hybrid System
    Generally: The rules of priority and order allocation procedures 
set forth in this rule shall apply only to index options and options on 
ETFs that have been designated for trading on the CBOE Hybrid System. 
The term ``market participant'' as used throughout this rule refers to 
a Market-Maker, a Remote Market-Maker, an in-crowd DPM or LMM, an e-DPM 
with an appointment in the subject class, and a floor broker 
representing orders in the trading crowd. The term ``in-crowd market 
participant'' only includes an in-crowd Market-Maker, in-crowd DPM or 
LMM, and floor broker representing orders in the trading crowd.
    (a) Allocation of Incoming Electronic Orders: The appropriate 
Exchange

[[Page 57342]]

procedures committee will determine to apply, for each class of 
options, one of the following rules of trading priority described in 
paragraphs (i) or (ii). The Exchange will issue a Regulatory Circular 
periodically specifying which priority rules will govern which classes 
of options any time the appropriate Exchange committee changes the 
priority.
(i) Price-Time or Pro-Rata Priority
    Price-Time Priority: Under this method, resting quotes and orders 
in the book are prioritized according to price and time. If there are 
two or more quotes or orders at the best price then priority is 
afforded among these quotes or orders in the order in which they were 
received by the Hybrid System; or
    Pro-Rata Priority: Under this method, resting quotes and orders in 
the book are prioritized according to price. If there are two or more 
quotes or orders at the best price then trades are allocated 
proportionally according to size (in a pro-rata fashion). The 
executable quantity is allocated to the nearest whole number, with 
fractions \1/2\ or greater rounded up and fractions less than \1/2\ 
rounded down. If there are two market participants that both are 
entitled to an additional \1/2\ contract and there is only one contract 
remaining to be distributed, the additional contract will be 
distributed to the market participant whose quote or order has time 
priority.
Additional Priority Overlays Applicable to Price-Time or Pro-Rata 
Priority Methods
    In addition to the base allocation methodologies set forth above, 
the appropriate Exchange procedures committee may determine to apply, 
on a class-by-class basis, either or both of the following designated 
market participant overlay priorities. The Exchange will issue a 
Regulatory Circular periodically which will specify which classes of 
options are subject to these additional priorities as well as any time 
the appropriate Exchange procedures committee changes these priorities.
    (1) Public Customer: When this priority overlay is in effect, the 
highest bid and lowest offer shall have priority except that public 
customer orders shall have priority over non-public customer orders at 
the same price. If there are two or more public customer orders for the 
same options series at the same price, priority shall be afforded to 
such public customer orders in the sequence in which they are received 
by the System, even if the Pro-Rata Priority allocation method is the 
chosen allocation method. For purposes of this Rule, a Public Customer 
order is an order for an account in which no member, non-member 
participant in a joint-venture with a member, or non-member broker-
dealer (including a foreign broker-dealer) has an interest. (2) 
Participation Entitlement: The appropriate Exchange procedures 
committee may determine to grant Market-Makers [DPMs, LMMs, or e-DPMs] 
participation entitlements pursuant to the provisions of Rule 8.87, 
Rule 8.13, or 8.15B. In allocating the participation entitlement, all 
of the following shall apply:
    (A) To be entitled to their participation entitlement, the Market-
Maker's [a DPM's or LMM's or e-DPM's] order and/or quote must be at the 
best price on the Exchange.
    (B) The Market-Maker [A DPM or LMM or e-DPM] may not be allocated a 
total quantity greater than the quantity that it [the DPM or LMM or e-
DPM] is quoting (including orders not part of quotes) at that price. If 
Pro-Rata Priority is in effect, and the Market-Maker's [DPM's or LMM's 
or e-DPM's] allocation of an order pursuant to its participation 
entitlement is greater than its percentage share of quotes/orders at 
the best price at the time that the participation entitlement is 
granted, the Market-Maker [DPM or LMM or e-DPM] shall not receive any 
further allocation of that order.
    (C) In establishing the counterparties to a particular trade, the 
[DPM's or LMM's or e-DPM's] participation entitlement must first be 
counted against that Market-Maker's [the DPM's or LMM's or e-DPM's] 
highest priority bids or offers. (D) The participation entitlement 
shall not be in effect unless the Public Customer priority is in effect 
in a priority sequence ahead of the participation entitlement and then 
the participation entitlement shall only apply to any remaining 
balance.
    (ii) Ultimate Matching Algorithm (``UMA''): Under this method, a 
market participant who enters a quotation and whose quote is 
represented by the disseminated CBOE best bid or offer (``BBO'') shall 
be eligible to receive allocations of incoming electronic orders for up 
to the size of its quote, in accordance with the principles described 
below. As an initial matter, if the number of contracts represented in 
the disseminated quote is less than the number of contracts in an 
incoming electronic order(s), the incoming electronic order(s) shall 
only be entitled to receive a number of contracts up to the size of the 
disseminated quote, in accordance with Rule 6.45B(a)(ii)(B). The 
balance of the electronic order will be eligible to be filled at the 
refreshed quote either electronically (in accordance with paragraph 
(a)(ii)(B) below) or manually (in accordance with Rule 6.45B(b)) and, 
as such, may receive a split price execution.
(A) Priority of Orders in the Electronic Book
    (1) Public Customer Orders: Public customer orders in the 
electronic book have priority. Multiple public customer orders in the 
electronic book at the same price are ranked based on time priority. If 
a public customer order(s) in the electronic book matches, or is 
matched by, a market participant quote, the public customer order(s) 
shall have priority and, the balance of the incoming order, if any, 
will be allocated pursuant to Rule 6.45B(a)(ii).
    (2) Broker-dealer Orders: If pursuant to Rule 7.4(a) the 
appropriate Exchange procedures committee determines to allow certain 
types of broker-dealer orders to be placed in the electronic book, then 
for purposes of this rule, the cumulative number of broker-dealer 
orders in the electronic book at the best price shall be deemed one 
``market participant'' regardless of the number of broker-dealer orders 
in the book. The allocation due the broker-dealer orders in the 
electronic book by virtue of their being deemed a ``market 
participant'' shall be distributed among each broker-dealer order 
comprising the ``market participant'' pursuant to Rule 6.45B(a)(ii)(B).
(B) Allocation
    (1) Market Participant Quoting Alone at BBO: When a market 
participant is quoting alone at the disseminated CBOE BBO and is not 
subsequently matched in the quote by other market participants prior to 
execution, it will be entitled to receive incoming electronic order(s) 
up to the size of its quote. If another market participant joins in the 
disseminated quote prior to execution of an incoming electronic 
order(s) such that more than one market participant is quoting at the 
BBO, incoming electronic order(s) will be distributed in accordance 
with (B)(2) below.
    (2) More than One Market Participant Quoting at BBO: When more than 
one market participant is quoting at the BBO, inbound electronic orders 
shall be allocated pursuant to the following allocation algorithm:

[[Page 57343]]

[GRAPHIC] [TIFF OMITTED] TN30SE05.035

Where:
Component A: The percentage to be used for Component A shall be an 
equal percentage, derived by dividing 100 by the number of market 
participants quoting at the BBO.
Component B: Size Pro-rata Allocation. The percentage to be used for 
Component B of the Allocation Algorithm formula is that percentage that 
the size of each market participant's quote at the best price 
represents relative to the total number of contracts in the 
disseminated quote.
Final Weighting: The final weighting formula, which shall be 
established by the appropriate Exchange procedures committee and may 
vary by product, shall be a weighted average of the percentages derived 
for Components A and B multiplied by the size of the incoming order. 
Changes made to the percentage weightings of Components A and B shall 
be announced to the membership via Regulatory Circular at least one day 
before implementation of the change.

    (C) Participation Entitlement: If a Market-Maker [DPM, LMM, or e-
DPM] is eligible for an allocation pursuant to the operation of the 
Algorithm described in paragraph (a) of Rule 6.45B and is also eligible 
for an allocation pursuant to a participation entitlement under Rules 
8.13, 8.15B, or 8.87, the Market-Maker [DPM, LMM, or e-DPM] may be 
entitled to receive an allocation (not to exceed the size of its quote) 
equal to either:
    (1) The greater of the amount it would be entitled to pursuant to 
the participation entitlement [right established pursuant to Rule 8.87 
or 8.15B (and Regulatory Circulars issued thereunder)] or the amount it 
would otherwise receive pursuant to the operation of the Algorithm 
described above provided, however, that in calculating a [the] DPM's or 
LMM's allocation under the Algorithm, DPMs or LMMs utilizing more than 
one membership in the trading crowd where the subject class is traded 
shall count as two market participants for purposes of Component A of 
the Algorithm; or
    (2) The amount it would be entitled to pursuant to the 
participation entitlement [right established pursuant to Rule 8.87 or 
8.15B (and Regulatory Circulars issued thereunder)]; or
    (3) The amount it would be entitled to receive pursuant to the 
operation of the Algorithm described above provided, however, that in 
calculating a [the] DPM's or LMM's allocation under the Algorithm, DPMs 
or LMMs utilizing more than one membership in the trading crowd where 
the subject class is traded shall count as two market participants for 
purposes of Component A of the Algorithm.
    The appropriate Exchange procedures committee shall determine which 
of the preceding three entitlement formulas will be in effect on a 
class-by-class basis. All pronouncements regarding the entitlement 
formula shall be made via Regulatory Circular. The participation 
entitlement percentage is expressed as a percentage of the remaining 
quantity after all public customer orders in the electronic book have 
been executed.
    (b)-(d) No change.
    * * * Interpretations and Policies:
    .01-.02. No change.
* * * * *
Rule 8.15B Participation Entitlement of LMMs
    (a) The appropriate Market Performance Committee may establish, on 
a class-by-class basis, a participation entitlement formula that is 
applicable to LMMs.
    (b) To be entitled to a participation entitlement, the LMM must be 
quoting at the best bid/offer on the Exchange and the LMM may not be 
allocated a total quantity greater than the quantity for which the LMM 
is quoting at the best bid/offer on the Exchange. The participation 
entitlement is based on the number of contracts remaining after all 
public customer orders in the book at the best bid/offer on the 
Exchange have been satisfied. The participation entitlement set forth 
in this Rule shall not apply in instances where a Preferred Market-
Maker receives a participation entitlement pursuant to Rule 8.13.
    (c) The LMM participation entitlement shall be: 50% when there is 
one Market-Maker also quoting at the best bid/offer on the Exchange; 
40% when there are two Market-Makers also quoting at the best bid/offer 
on the Exchange; and, 30% when there are three or more Market-Makers 
also quoting at the best bid/offer on the Exchange. If more than one 
LMM is entitled to a participation entitlement, such entitlement shall 
be distributed equally among all eligible LMMs provided, however, that 
an LMM may not be allocated a total quantity greater than the quantity 
for which the LMM is quoting at the best bid/offer on the Exchange.
    The appropriate Market Performance Committee may determine, on a 
class-by-class basis, to decrease the LMM participation entitlement 
percentages from the percentages specified in paragraph (c). Such 
changes will be announced to the membership in advance of 
implementation via Regulatory Circular.
* * * * *
Rule 8.87. Participation Entitlement of DPMs and e-DPMs
    (a) Subject to the review of the Board of Directors, the MTS 
Committee may establish from time to time a participation entitlement 
formula that is applicable to all DPMs.
    (b) The participation entitlement for DPMs and e-DPMs (as defined 
in Rule 8.92) shall operate as follows:
    (1) Generally.
    (i) To be entitled to a participation entitlement, the DPM/e-DPM 
must be quoting at the best bid/offer on the Exchange.
    (ii) A DPM/e-DPM may not be allocated a total quantity greater than 
the quantity that the DPM/e-DPM is quoting at the best bid/offer on the 
Exchange.
    (iii) The participation entitlement is based on the number of 
contracts remaining after all public customer orders in the book at the 
best bid/offer on the Exchange have been satisfied.
    (2) Participation Rates applicable to DPM Complex. The collective 
DPM/e-DPM participation entitlement shall be: 50% when there is one 
Market-Maker also quoting at the best bid/offer on the Exchange; 40% 
when there are two Market-Makers also quoting at the best bid/offer on 
the Exchange; and, 30% when there are three or more Market-Makers also 
quoting at the best bid/offer on the Exchange.
    (3) Allocation of Participation Entitlement Between DPMs and e-
DPMs. The participation entitlement

[[Page 57344]]

shall be as follows: If the DPM and one or more e-DPMs are quoting at 
the best bid/offer on the Exchange, the e-DPM participation entitlement 
shall be one-half (50%) of the total DPM/e-DPM entitlement and shall be 
divided equally by the number of e-DPMs quoting at the best bid/offer 
on the Exchange. The remaining half shall be allocated to the DPM. If 
the DPM is not quoting at the best bid/offer on the Exchange and one or 
more e-DPMs are quoting at the best bid/offer on the Exchange, then the 
e-DPMs shall be allocated the entire participation entitlement (divided 
equally between them). If no e-DPMs are quoting at the best bid/offer 
on the Exchange and the DPM is quoting at the best bid/offer on the 
Exchange, then the DPM shall be allocated the entire participation 
entitlement. If only the DPM and/or e-DPMs are quoting at the best bid/
offer on the Exchange (with no Market-Makers at that price), the 
participation entitlement shall not be applicable and the allocation 
procedures under Rule 6.45A shall apply.
    (4) [Allocation of] Participation Entitlement In Instances Where a 
Preferred Market-Maker Receives a Participation Entitlement Pursuant to 
Rule 8.13.
    The participation entitlement set forth in this Rule shall not 
apply in instances where a Preferred Market-Maker receives a 
participation entitlement pursuant to Rule 8.13. [Between DPMs and e-
DPMs for Orders Specifying a Preferred DPM. Notwithstanding the 
provisions of subparagraph (b)(3) above, the Exchange may allow, on a 
class-by-class basis, for the receipt of marketable orders, through the 
Exchange's Order Routing System when the Exchange's disseminated quote 
is the NBBO, that carry a designation from the member transmitting the 
order that specifies a DPM or e-DPM in that class as the ``Preferred 
DPM'' for that order.
    In such cases and after the provisions of subparagraph (b)(1)(i) 
and (iii) above have been met, then the Preferred DPM participation 
entitlement shall be 50% when there is one Market-Maker also quoting at 
the best bid/offer on the Exchange; and 40% when there are two or more 
Market-Makers also quoting at the best bid/offer on the Exchange, 
subject to the following:
    (i) If the Preferred DPM is not quoting at the best bid/offer on 
the Exchange then the participation entitlement set forth in 
subparagraph (b)(3) above shall apply;
    (ii) In no case shall the Preferred DPM be allocated, pursuant to 
this participation right, a total quantity greater than the quantity 
that the Preferred DPM is quoting at the best bid/offer on the 
Exchange.
    The Preferred DPM participation entitlement set forth in 
subparagraph (b)(4) of this Rule shall be in effect until June 2, 2006 
on a pilot basis.]
    * * * Interpretations and Policies:
    .01 No change.
* * * * *

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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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
    CBOE Rule 8.87 governs the application of the Exchange's recently 
approved Preferred DPM Program.\4\ Under the program, order providers 
can send an order to the Exchange designating a ``Preferred DPM'' from 
among the DPM Complex.\5\ If the Preferred DPM is quoting at the 
national best bid or offer (``NBBO'') at the time the order is received 
on CBOE, the Preferred DPM, after public customer orders at the best 
bid/offer on the Exchange are filled, is entitled to a 40% allocation 
of the order when there are two or more Market-Makers also quoting at 
the best bid/offer on the Exchange, and 50% when there is one Market-
Maker also quoting at the best bid/offer on the Exchange.\6\
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 51779 (June 2, 2005), 70 
FR 33564 (June 8, 2005) (order approving File No. SR-CBOE-2004-71). 
A modification to the applicable participation entitlement 
percentages under the program was also recently effected. See 
Securities Exchange Act Release No. 51824 (June 10, 2005), 70 FR 
35476 (June 20, 2005) (notice of filing and immediate effectiveness 
of File No. SR-CBOE-2005-45). See also Securities Exchange Act 
Release No. 52021 (July 13, 2005), 70 FR 41462 (July 19, 2005) 
(notice of filing and order granting accelerated approval to File 
No. SR-CBOE-2005-50).
    \5\ The DPM Complex consists of the DPM and electronic DPMs in 
the class. See supra note 3.
    \6\ Id.
---------------------------------------------------------------------------

    The Philadelphia Stock Exchange (``Phlx'') recently obtained 
approval of a Directed Order Program that allows a recipient of a 
directed order on the Phlx to receive a 40% participation entitlement 
on designated orders received while that entity is quoting at the 
NBBO.\7\ The International Securities Exchange (``ISE'') also recently 
obtained approval to implement a preferencing program that allows a 
preferenced ISE market maker to receive a 40% participation entitlement 
on designated orders received while that market maker is quoting at the 
NBBO.\8\ Unlike CBOE's program, these exchanges allow any non-
specialist market maker to receive ``preferred'' orders, provided such 
market maker is fulfilling certain heightened quoting obligations. The 
purpose of this filing is to expand CBOE's Preferred DPM Program to 
allow any CBOE Market-Maker to receive Preferred orders.
---------------------------------------------------------------------------

    \7\ Securities Exchange Act Release No. 51759 (May 27, 2005), 70 
FR 32860 (June 6, 2005) (order approving File No. SR-Phlx-2004-91).
    \8\ Securities Exchange Act Release No. 51818 (June 10, 2005), 
70 FR 35146 (June 16, 2005) (order approving File No. SR-ISE-2005-
18).
---------------------------------------------------------------------------

    The Exchange proposes to accomplish this by renaming the program 
the ``Preferred Market-Maker Program'' and creating new CBOE Rule 8.13 
to govern the program. That rule is virtually identical to the portion 
of CBOE Rule 8.87 that pertains to the Preferred DPM Program (which 
would be deleted), except that the new rule (i) Would expand the 
program to non-DPM Market-Makers (including Remote Market-Makers and 
Lead Market-Makers), (ii) would provide that a Market-Maker would be 
required to have an appointment in a class in order to receive 
Preferred orders in that class, (iii) would provide that, to receive a 
Preferred order, a Market-Maker would be required to provide continuous 
two-sided quotations in at least 90% of the series of each class for 
which it receives Preferred Market Maker orders; and (iv) would provide 
that, if a participation entitlement is provided under CBOE Rule 8.13, 
no other participation entitlement under any other rule would apply. 
Provisions also would be added to the rules establishing participation 
entitlements for DPMs and LMMs (CBOE Rule 8.87 and CBOE Rule 8.15B) to 
expressly provide that participation entitlements under those rules 
would not apply in instances where a participation entitlement is 
granted pursuant to new CBOE Rule 8.13. Lastly, changes are proposed to 
CBOE's Hybrid order allocation rules (CBOE Rule 6.45A for equity 
options and CBOE Rule 6.45B for index options) to provide that Market-
Makers receiving a Preferred participation entitlement pursuant to CBOE 
Rule 8.13 may be

[[Page 57345]]

allocated the greater of such entitlement or the quantity that the 
Market-Maker would receive under the applicable matching algorithm of 
the order allocation rule in effect. The matching algorithm rules 
already contain such language for DPMs; the language now would merely 
be expanded to include any Preferred Market-Maker.
    The Exchange notes that the Preferred DPM program is operating as a 
one-year pilot program.
2. Statutory Basis
    The CBOE believes the proposed rule change is consistent with 
Section 6(b) of the Act,\9\ in general, and furthers the objectives of 
Section 6(b)(5),\10\ in particular, in that it is designed to promote 
just and equitable principles of trade, 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in the 
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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2005-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CBOE-2005-58. 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, 100 F Street, 
NE., 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 publicly available. All 
submissions should refer to File Number SR-CBOE-2005-58 and should be 
submitted on or before October 21, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder, applicable to a national securities 
exchange.\11\ In particular, the Commission believes that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\12\ which 
requires among other things, that the rules of the Exchange are 
designed to promote just and equitable principles of trade, 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. The Commission notes that the Preferred DPM Program 
currently operates on a pilot basis.\13\ The proposal would expand the 
Preferred DPM Program to allow any non-DPM Market-Maker to receive 
Preferred orders in a class. The Commission notes that a non-DPM 
Market-Maker: (i) Must have an appointment in a class; (ii) must 
provide continuous two-sided quotations in at least 90% of the series 
of that class; and (iii) must be quoting at the best bid/offer on the 
Exchange (which would be the NBBO) in order to receive a participation 
entitlement in that class under the Preferred Market-Maker Program. In 
addition, the Commission notes that it has approved similar 
preferencing programs on other options exchanges.\14\ Furthermore, the 
Commission notes that the Exchange represented that it will proactively 
conduct surveillance for, and enforce against, coordinated actions 
between a Market-Maker and an order entry firm.\15\
---------------------------------------------------------------------------

    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See supra note 4.
    \14\ See supra notes 7 and 8.
    \15\ See letter from Angelo Evangelou, Managing Senior Attorney, 
Legal Division, CBOE, to John Roeser, Assistant Director, Division 
of Market Regulation, Commission, dated September 19, 2005.
---------------------------------------------------------------------------

    The CBOE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
believes that granting accelerated approval of the proposal should 
allow the CBOE to immediately implement its Preferred Market-Maker 
Program. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\16\ for approving the proposed rule change 
prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2005-58) be, and hereby 
is, approved on an accelerated basis, for a pilot period to expire on 
June 2, 2006.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. E5-5324 Filed 9-29-05; 8:45 am]

BILLING CODE 8010-01-P
