

[Federal Register: April 12, 2006 (Volume 71, Number 70)]
[Notices]               
[Page 18788-18789]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ap06-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53603; File No. SR-CBOE-2005-112]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Permanent Approval of a Pilot Program 
Relating to Access to the Exchange's Hybrid Automatic Execution System

April 5, 2006.
    On December 30, 2005, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (``Commission'') a proposed rule change pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ to make permanent the pilot program in 
CBOE Rule 6.13 relating to access to the Exchange's automatic execution 
system. The proposed rule change was published for comment in the 
Federal Register on March 6, 2006.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53377 (February 27, 
2006), 71 FR 11250.
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    The pilot program the Exchange seeks to make permanent was 
initiated in July 2004, was subsequently extended twice, and is 
currently scheduled to expire on October 12, 2006.\4\ Under the pilot 
program, pursuant to CBOE Rule 6.13(b)(i)(C)(iii), orders from market 
makers and specialists on an options exchange (``options Market 
Makers'') and stock exchange specialists,\5\ with respect to their 
specialty securities, are eligible for automatic execution through the 
Exchange's Hybrid Trading System (``Hybrid''), subject to a 15-second 
limitation \6\ on orders on the same side of the market in an options 
class for an account or accounts of the same beneficial owner. The 
Exchange believes that the pilot program has been successful and has 
helped to contribute to the maintenance of efficient markets and to 
attract volume to the Exchange.
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    \4\ See Securities Exchange Act Release Nos. 50005 (July 12, 
2004), 69 FR 43032 (July 19, 2004) (approving the pilot program); 
51030 (January 12, 2005), 70 FR 3404 (January 24, 2005) (extending 
the pilot program until October 12, 2005); and 52494 (September 22, 
2005), 70 FR 56943 (September 29, 2005) (extending the pilot program 
until October 12, 2006).
    \5\ By its terms, CBOE Rule 6.13(b)(i)(C)(iii) applies to orders 
eligible for submission pursuant to CBOE Rule 6.13(b)(i)(C)(ii), 
which relates to options Market Makers and certain stock exchange 
specialists.
    \6\ As allowed under CBOE Rule 6.13(b)(i)(C)(iii), the 
Exchange's floor procedure committees determined to shorten to five 
seconds (from 15 seconds) the period required between entry of 
multiple market maker orders (including non-CBOE market maker 
orders) on the same side of the market in an option class for an 
account or accounts of the same beneficial owner using Hybrid. This 
change went into effect on July 18, 2005 and was announced to the 
Exchange's membership via Regulatory Circular RG05-61. The Exchange 
clarified that such reduction in the time period to five seconds 
applies to all of the market participants subject to the pilot 
program under CBOE Rule 6.13(b)(i)(C)(iii). Telephone conversation 
between Jennifer M. Lamie, Managing Senior Attorney, Exchange, and 
Kim M. Allen, Special Counsel, Division of Market Regulation, 
Commission, on March 29, 2006.
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    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6 of the Act 
\7\ and the rules and regulations thereunder applicable to a national 
securities exchange.\8\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\9\ 
which requires, among other things, that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and

[[Page 18789]]

practices, 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 believes that prohibiting members from 
causing the entry into Hybrid of more than one order from options 
Market Makers or stock exchange specialists for the same beneficial 
account within a maximum 15-second period should help reduce the risk 
of exposure of CBOE market makers. The Commission notes that the 15-
second restriction set forth in the rule provides a sufficient period 
to allow CBOE market makers to change their quotations following an 
execution, without placing an undue burden on market participants 
seeking to execute transactions on the Exchange.\10\ The Commission 
further notes that market participants subject to the 15-second 
restriction will still be permitted to send orders to the Exchange for 
execution through the Intermarket Option Linkage pursuant to the terms 
of the Plan for the Purpose of Creating and Operating an Intermarket 
Option Linkage.
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    \7\ 15 U.S.C. 78f.
    \8\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ The Commission notes that the Exchange may not take 
punitive action against any non-member options market maker 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).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2005-112) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Nancy M. Morris,
Secretary.
[FR Doc. E6-5365 Filed 4-11-06; 8:45 am]

BILLING CODE 8010-01-P
