

[Federal Register: July 6, 2006 (Volume 71, Number 129)]
[Notices]               
[Page 38435-38437]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy06-120]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54067; File No. SR-CBOE-2006-57]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Amend CBOE Rule 8.7 Relating to Bid/Ask Differentials

June 29, 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 June 21, 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, II, and III 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. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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

    The Exchange proposes to amend CBOE Rule 8.7, ``Obligations of 
Market-Makers,'' relating to bid/ask differentials in Hybrid and Hybrid 
2.0 classes. The text of the proposed rule change appears below. 
Additions are italicized.
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *
Rule 8.7--Obligations of Market-Makers
    Rule 8.7. (a) No change.
    (b) No change.
    (i)-(iii) No change.
    (iv) To price options contracts fairly by, among other things, 
bidding and/or offering in the following manner:
    (A) No change.
    (B) No change.
    (C) Option Classes Trading on the Hybrid Trading System and Hybrid 
2.0 Platform. Except as provided in subparagraphs (i) and (ii) below, 
option classes trading on the Hybrid Trading System and the Hybrid 2.0 
Platform may be quoted electronically with a difference not to exceed 
$5 between the bid and offer regardless of the price of the bid. The 
provisions of Rule 8.7(b)(iv)(A) shall apply to any quotes given in 
open outcry in Hybrid classes and Hybrid 2.0 classes.
    i. The $5 bid/ask differential stated in subparagraph (C) above 
shall not apply to at-the-money series or in-the-money series where the 
quote width on the primary market of the underlying security, or the 
quote width calculated by the Exchange or its agent for various indices 
pursuant to Interpretation .08, is wider than $5. For these series, the 
bid/ask differential may be as wide as the quote width on the primary 
market of the underlying security or calculated by the Exchange or its 
agent, as applicable.

[[Page 38436]]

For purposes of this subparagraph (C)(i), ``in-the-money series'' are 
defined as follows: for call options, all strike prices below the offer 
or last sale in the underlying security (whichever is higher); and for 
put options, all strike prices above the bid or last sale in the 
underlying security (whichever is lower); and
    ii. No change.
    (c)-(e) No change.

* * * Interpretations and Policies:

    .01-.13 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 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 CBOE proposes to amend CBOE Rule 8.7(b)(iv)(C)(i) relating to 
bid/ask differentials in the Hybrid Trading System and Hybrid 2.0 
Platform classes. Specifically, the CBOE proposes to revise the text of 
CBOE Rule 8.7(b)(iv)(C)(i) to include an interpretation of the meaning 
of ``in-the-money'' series and to include ``at-the-money'' series 
within the provisions of that paragraph.
    Recently, the CBOE amended its Rule 8.7 to provide, among other 
things, an exception to the general requirement that option classes 
trading on the Hybrid Trading System and the Hybrid 2.0 Platform may be 
quoted electronically with bid/ask differentials not to exceed $5 
between the bid and offer regardless of the price of the bid.\5\ One 
exception to this general requirement is that the $5 bid/ask 
differential does not apply to in-the-money series where the quote 
width on the primary market of the underlying security, or the quote 
width calculated by the Exchange or its agent for various indices 
pursuant to Interpretation .08 of CBOE Rule 8.7, is wider than $5. For 
these in-the-money series, the bid/ask differential may be as wide as 
the quote width on the primary market of the underlying security or the 
quote width calculated by the Exchange or its agent, as applicable.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 53229 (February 6, 
2006), 71 FR 7095 (February 10, 2006) (notice of filing and 
immediate effectiveness of File No. SR-CBOE-2006-12).
---------------------------------------------------------------------------

    The CBOE proposes to include in the text of CBOE Rule 
8.7(b)(iv)(C)(i) an interpretation of the meaning of ``in-the-money'' 
series. The Exchange proposes that, for call options, ``in-the-money'' 
series include all strike prices below the offer or last sale in the 
underlying security, whichever is higher, and for put options, ``in-
the-money'' series include all strike prices at or above the bid or 
last sale in the underlying security, whichever is lower. The CBOE 
believes that its proposed interpretation is consistent with the 
definition of ``in-the-money'' series included in the Options 
Disclosure Document (``ODD''), ``Characteristics and Risks of 
Standardized Options.'' \6\
---------------------------------------------------------------------------

    \6\ In the ODD, ``in-the-money'' series are defined as: ``A call 
option is said to be in the money if the current market value of the 
underlying interest is above the exercise price of the option. A put 
option is said to be in the money if the current market value of the 
underlying interest is below the exercise price of the option.''
---------------------------------------------------------------------------

    The CBOE also proposes to amend paragraph (b)(iv)(C)(i) of CBOE 
Rule 8.7 to state that the $5 bid/ask differential also will not apply 
to at-the-money series where the quote width on the primary market of 
the underlying security, or the quote width calculated by the Exchange 
or its agent for various indices pursuant to Interpretation .08 of CBOE 
Rule 8.7, is wider than $5. The Exchange proposes that, for these at-
the-money series, the bid/ask differential may be as wide as the quote 
width on the primary market of the underlying security or the quote 
width calculated by the Exchange or its agent, as applicable.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\7\ Specifically, the Exchange believes the 
proposed rule change is consistent with the requirements under Section 
6(b)(5) of the Act \8\ that the rules of a national securities exchange 
be designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 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 
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 Exchange neither solicited nor received comments on the 
proposal.

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

    The Exchange 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),\9\ 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 \10\ 
and Rule 19b-4(f)(6) thereunder.\11\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.19b-4(f)(6)(iii).
    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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:

[[Page 38437]]

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-2006-57 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-2006-57. 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 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-2006-57 and should be submitted on or before July 27, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-10530 Filed 7-5-06; 8:45 am]

BILLING CODE 8010-01-P
