

[Federal Register: October 28, 2005 (Volume 70, Number 208)]
[Notices]               
[Page 62149-62151]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc05-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52659; File No. SR-CBOE-2005-85]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Rule 
Change To Adopt a Market Turner Priority for Index Options and Options 
on ETFs on the Exchange's Hybrid System

October 24, 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 October 14, 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 
Exchange has filed the proposal pursuant to Section 19(b)(3)(A) of the 
Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. 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).
    \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 modify its Hybrid System rule regarding 
priority and allocation of trades in index options and options on ETFs 
to adopt a market turner priority. The Exchange has designated this 
proposal as non-controversial and has requested that the Commission 
waive the 30-day pre-operative waiting period contained in Rule 19b-
4(f)(6)(iii) under the Act.\5\ The text of the proposed rule change is 
available on CBOE's Web site (http://www.cboe.com), at the CBOE's 

Office of the Secretary, and at the Commission's Public Reference Room.
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    \5\ 17 CFR 240.19b-4(f)(6)(iii).
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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

[[Page 62150]]

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 add a market turner priority (which has 
already been approved for CBOE's screen-based trading (``SBT'') rules) 
\6\ to its Hybrid trading rules for index options and options on ETFs.
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    \6\ See Securities Exchange Act Release No. 47628 (Apr. 3, 
2003), 68 FR 17697 (Apr. 10, 2003) (SR-CBOE-00-55) (``SBT Order'').
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    In April 2003, the Commission approved the CBOE's SBT rules 
(Chapters 40-46).\7\ CBOE Rule 43.1 is the matching algorithm rule 
applicable to trading on the SBT platform.\8\ The Exchange states that, 
essentially, CBOE Rule 43.1 calls for the use of either price-time 
priority or pro-rata priority as the base order allocation methodology. 
The rule then allows for three additional priority overlays: Public 
customer priority for public customer orders resting on the SBT system; 
participation right guarantees for certain qualifying market-makers; 
and a market turner priority for participants that are first to improve 
the CBOE's disseminated quote. These overlays are optional.
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    \7\ See SBT Order.
    \8\ The Exchange states that no products currently trade 
pursuant to the SBT rules.
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    The Exchange states that recently approved CBOE Rule 6.45B,\9\ 
relating to priority and order allocation for index options and options 
on ETFs trading on the Exchange's Hybrid System, is based in part on 
CBOE Rule 43.1 in that it allows for the selection of price-time or 
pro-rata as an order allocation methodology (CBOE's Ultimate Matching 
Algorithm is also an option) and allows for customer priority and 
participation entitlement overlays. The Exchange now seeks to add a 
market turner overlay to CBOE Rule 6.45B so that index products trading 
on the Hybrid System may trade with a market turner priority.
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    \9\ See Securities Exchange Act Release No. 51822 (Jun. 10, 
2005), 70 FR 35321 (Jun. 17, 2005) (SR-CBOE-2004-87).
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    Here is how the market turner priority overlay works under CBOE 
Rule 43.1: assume the pro-rata allocation methodology is in place for 
option class ABC and that no other overlays are in effect. Also assume 
that the market for a particular series is 1.00--1.15. If Market-Maker 
A enters a bid for 1.05 for 100 contracts, Market-Maker A becomes the 
market turner at 1.05. To the extent others join the 1.05 bid, Market-
Maker A would have priority at that price until its bid size is 
exhausted. Thus, the market turner will receive 100% of an incoming 
order until its quote is exhausted. This is true even if a 1.10 bid is 
entered and is then traded while the market turner's 1.05 bid remains 
unexecuted (i.e., the market turner priority at a given price is 
retained once it is earned, even if the disseminated quote changes).
    The Exchange is proposing to add this priority overlay to its index 
Hybrid rules,\10\ but with flexibility to allow the Exchange to 
allocate less than 100% of an incoming order to the market turner. For 
example, taking the same facts as the example described above, assume 
that the Exchange has in place a 40% allocation for market turners and 
that Market-Maker A is joined at 1.05 by Market-Maker B for 60 
contracts and Market-Maker C for 60 contracts. Also assume a sell 
market order is received for 100 contracts. As proposed, Market-Maker A 
would have priority for 40 contracts. The remaining 60 contracts would 
be divided pro-rata between all three participants at 1.05 (20 
contracts to each). Thus, with this ``modified'' market turner 
priority, Market-Maker A receives 60 contracts of the order (but is 
only guaranteed 40), whereas under CBOE Rule 43.1, Market-Maker A would 
be guaranteed 100 contracts. The Exchange states that this is the only 
material difference between CBOE Rule 43.1 and what the Exchange is 
proposing to adopt for CBOE Rule 6.45B.
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    \10\ The Exchange states that most options trading on CBOE 
currently trades on the Hybrid System.
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    The Exchange is also clarifying in the proposed rule that the 
market turner priority only remains in effect for the duration of the 
trading day and that it cannot be established until after the opening 
rotation.
    Finally, the Exchange notes that, like public customer priority and 
the participation entitlement, the market turner priority is optional. 
The Exchange states that the appropriate Exchange procedures committee 
would determine whether one or more of these priority overlays would 
apply to a product and if more than one is selected, the sequence in 
which they would apply (consistent with applicable rules). The Exchange 
states that all determinations would be set forth in a regulatory 
circular.
2. Statutory Basis
    The Exchange states that this change will provide it with another 
method to reward aggressive pricing in index options and options on 
ETFs trading on the Hybrid System. Accordingly, the Exchange believes 
that the proposed rule change is consistent with Section 6(b) of the 
Act \11\ in general, and furthers the objectives of Section 6(b)(5) of 
the Act \12\ in particular, in that the rules of an exchange be 
designed to promote just and equitable principles of trade, and to 
protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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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 
result in any burden on competition that is not necessary or 
appropriate in 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change is subject to Section 
19(b)(3)(A)(iii) of the Act \13\ and Rule 19b-4(f)(6) thereunder \14\ 
because the proposal: (i) Does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; and (iii) does not become operative 
prior to 30 days after the date of filing or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest; provided that the Exchange has given the 
Commission notice of its intent to file the proposed rule change, along 
with a brief description and text of 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.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
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    The CBOE has satisfied the five-day pre-filing requirement. In 
addition, the Exchange has requested that the Commission waive the 30-
day operative delay. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because such waiver will permit the Exchange to 
implement the proposed

[[Page 62151]]

rule change without delay and thereby provide an incentive to parties 
on the Exchange to quote more aggressively as soon as possible. For 
these reasons, the Commission designates the proposal to be effective 
and operative upon filing with the Commission.\15\
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    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate 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.\16\
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    \16\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2005-85 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 20549-0609.
    All submissions should refer to File Number SR-CBOE-2005-85. 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 Room. Copies of the 
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 
File Number SR-CBOE-2005-85 and should be submitted on or before 
November 18, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5980 Filed 10-27-05; 8:45 am]

BILLING CODE 8010-01-P
