

[Federal Register: February 27, 2006 (Volume 71, Number 38)]
[Notices]               
[Page 9843-9845]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27fe06-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53331; File No. SR-CBOE-2006-17]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Extend a Pilot Program Relating to Market-Maker Bid-Ask 
Width Requirements for Non-Hybrid System Classes

February 17, 2006.
    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 February 15, 2006, 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 Exchange. 
The CBOE has filed this proposal pursuant to section 19(b)(3)(A)(iii) 
of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission.\5\ 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).
    \5\ The CBOE has asked the Commission to waive the 30-day 
operative delay provided in Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-
4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to extend until February 17, 2007, a pilot 
program establishing a limited exemption from the bid/ask differential 
requirements of CBOE Rule 8.7(b)(iv). The text of the proposed rule 
change appears below. Proposed new language is italicized; proposed 
deletions are [bracketed].

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 8.7. Obligations of Market-Makers

    (a)-(e) No Change.
    * * * Interpretations and Policies:
    .01-.12 No Change.
    .13 Market-Makers will be exempt from the requirements of 
subparagraph (b)(iv) of this Rule for a period of 30 seconds in cases 
where the Exchange automatically adjusts one side of the disseminated 
quote to one minimum increment below (above) the NBBO bid (offer): (1) 
because the size associated with that quote has been exhausted by 
automatic executions; or (2) to comply with the terms of the Plan for 
the Purpose of Creating and Operating an Intermarket Option Linkage. 
This exemption will be in effect until [February 17, 2006] February 17, 
2007 on a pilot basis.
* * * * *

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 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 is proposing to extend until February 17, 2007, a 
pilot program that provides a limited exemption from the Market-Maker 
bid/ask differential requirements contained in CBOE Rule 8.7(b)(iv).\6\ 
As part of accommodating compliance with the Plan for the Purpose of 
Creating and Operating an Intermarket Options Linkage (the ``Linkage 
Plan''),\7\ the Exchange introduced an ``autofade'' functionality for 
classes NOT trading on the CBOE's Hybrid platform (``Hybrid'') (there 
are currently fewer than 10 classes that are not on Hybrid).\8\ Because 
dynamic quoting is a feature of the Hybrid system, it does not require 
the autofade enhancement. Autofade causes one side of the CBOE's 
disseminated quote to move to an inferior price when the quote is 
required to fade pursuant to the terms of the Linkage Plan and/or when 
the size associated with the quote has been depleted by automatic 
Retail Automatic Execution System (``RAES'') executions (of both 
Linkage orders and non-Linkage orders). Without this enhancement, the 
system would not change the quote as required.
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    \6\ The Commission approved the pilot program on September 10, 
2003. See Securities Exchange Act Release No. 48471 (September 10, 
2003), 68 FR 54251 (September 16, 2003) (order approving File No. 
SR-CBOE-2003-08). The pilot program was subsequently extended for an 
additional 18 months, until February 17, 2006. See Securities 
Exchange Act Release No. 50292 (August 31, 2004), 69 FR 54167 
(September 7, 2004) (notice of filing and immediate effectiveness of 
File No. SR-CBOE-2004-39).
    \7\ The Commission approved the Linkage Plan on July 28, 2000. 
See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000).
    \8\ Hybrid is the CBOE's trading platform that allows individual 
Market Makers to submit electronic quotes in their appointed 
classes. See CBOE Rule 1.1(aaa).
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    Linkage orders are generally Immediate or Cancel limit orders 
priced at the national best bid or offer (``NBBO'') that must be acted 
upon within 15 seconds. The Linkage Plan provides several instances in 
which a Participant receiving a Linkage order must fade its quote. For 
example, if a Participant receives a Principal Acting as Agent (``PA'') 
order for a size greater than the Firm Customer Quote Size and does not 
execute the entirety of the PA Order within 15 seconds, the Participant 
is required to fade its quote. The CBOE's autofade functionality 
automates the fading process to ensure that members (and the Exchange) 
are in full compliance with this aspect of the Linkage Plan. Autofade 
moves the CBOE's quote to a price that is one tick inferior to the 
NBBO.\9\ This ensures that the Exchange will not immediately receive 
additional Linkage orders to allow the quote to refresh (either 
manually or through an autoquote update).
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    \9\ The only exception is when CBOE's NBBO quote (or next best 
quote) is represented by a customer order in the book. In such 
cases, the Exchange does not fade a booked order (it would have to 
be traded).
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    As mentioned above, autofade also applies any time an automatic 
execution of any order via RAES has depleted the size of the CBOE's 
quote. Once a quote is exhausted, autofade moves the quote to a price 
that is one tick inferior to the NBBO, as described above. For equity 
option classes that are not trading on the Hybrid System, the CBOE 
quote is generally derived from an autoquote system that is maintained 
by the

[[Page 9844]]

Designated Primary Market-Maker (``DPM''). Certain DPMs utilize an 
Exchange-provided autoquote system, while others employ proprietary 
autoquote systems. In either case, the autoquote system calculates bid 
and ask prices that are transmitted to the Exchange for dissemination 
to the Options Price Reporting Authority (``OPRA''). The DPM and the 
trading crowd separately input the size associated with the bid/ask 
prices. When an automatic execution occurs through the RAES system, the 
size associated with the quote is decremented until it is exhausted. 
However, because the autoquote system is only calculating prices and 
not quote sizes, the autoquote system is not aware that the size has 
been exhausted (or in the case of a remaining balance on a Linkage 
order, that the quote needs to fade in order to comply with the Linkage 
Plan). Therefore, the autofade functionality was built to override 
autoquote and move the quote price to one tick inferior to the NBBO. 
The ``override'' period only lasts for 30 seconds. However, the 
override can be overridden during that 30-second time period if the 
quote is manually updated by a trader or if the autoquote system 
transmits new bid/ask pricing to the Exchange.
    The exemption established by the pilot program is for limited 
instances where the autofade functionality moves the quote in a manner 
that causes the quote width to widen beyond the bid/ask parameters 
provided in CBOE Rule 8.7(b)(iv). The CBOE seeks to extend on a pilot 
basis the temporary exception to the requirements of CBOE Rule 
8.7(b)(iv) in cases where autofade causes a quote that exceeds the 
quote width parameters of that rule. The proposed exemption period 
lasts for a maximum of 30 seconds after any given autofade that caused 
a quote wider than allowed under CBOE Rule 8.7(b)(iv). Thus, to the 
extent a quote remained outside of the maximum width after the 30-
second time period, the responsible broker or dealer disseminating the 
quote would be deemed in violation of CBOE Rule 8.7(b)(iv) for 
regulatory purposes. The CBOE proposes to extend the pilot for one more 
year, until February 17, 2007.
2. Statutory Basis
    The CBOE believes that the proposed rule change will, among other 
things, allow the Exchange to more easily comply with the requirements 
of the Linkage Plan. Accordingly, the Exchange believes the proposed 
rule change is consistent with section 6(b) of the Act,\10\ in general, 
and furthers the objectives of section 6(b)(5) of the Act,\11\ in 
particular, in that it should promote just and equitable principles of 
trade, serve to remove impediments to, and perfect the mechanism of, a 
free and open market and a national market system, and protect 
investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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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 
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

    The CBOE neither solicited nor received comments on the proposal.

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

    The CBOE has designated the proposed rule change as one that: (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 for 30 days from the date of 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. In 
addition, as required under Rule 19b-4(f)(6)(iii),\12\ the CBOE 
provided the Commission with written notice of its intention to file 
the proposed rule change, along with a brief description and the text 
of the proposed rule change, at least five business days prior to 
filing the proposal with the Commission. Therefore, the foregoing rule 
change has become effective pursuant to section 19(b)(3)(A) of the Act 
\13\ and Rule 19b-4(f)(6) thereunder.\14\
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    \12\ 17 CFR 240.19b-4(f)(6)(iii).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act, a proposal does 
not become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest. The CBOE has asked the 
Commission to waive the 30-day operative delay to allow the pilot 
program to continue without interruption.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow the pilot program to continue to operate without 
interruption through February 17, 2007.\15\ Accordingly, the Commission 
waives the 30-day operative delay.
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    \15\ For purposes only of waiving the 30-day operative delay, 
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 the 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.

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-2006-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

    All submissions should refer to File No. SR-CBOE-2006-17. 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

[[Page 9845]]

Room. 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 No. SR-CBOE-2006-17 and should be submitted on or 
before March 20, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. 06-1733 Filed 2-24-06; 8:45 am]

BILLING CODE 8010-01-P
