

[Federal Register: July 27, 2006 (Volume 71, Number 144)]
[Notices]               
[Page 42692-42693]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy06-88]                         


[[Page 42692]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54182; File No. SR-CBOE-2006-51]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Regarding Market 
Maker Appointments

July 20, 2006.

I. Introduction

    On May 19, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to make the Market-Maker 
appointment process similar to the process applicable to Remote Market-
Maker (``RMM'') appointments. The proposed rule change was published 
for comment in the Federal Register on June 20, 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. 53975 (June 12, 
2006), 71 FR 35471.
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II. Description of the Proposal

    The proposal would allow a Market-Maker to create a Virtual Trading 
Crowd (``VTC'') appointment, which would confer the right to quote 
electronically in an appropriate number of Hybrid 2.0 Classes (as 
defined in CBOE Rule 1.1(aaa)) selected from ``tiers'' that have been 
structured according to trading volume statistics. Each class within a 
specific tier would be assigned an ``appointment cost'' depending upon 
its tier location, which would be identical to the tiers and 
appointment costs set forth in CBOE Rule 8.4(d) that have been 
structured for purposes of RMM appointments.
    With respect to Hybrid Classes (as defined in CBOE Rule 1.1(aaa)), 
CBOE proposes to allow a Market-Maker to quote electronically in Hybrid 
Classes that are located at one trading station. CBOE proposes to 
assign an appointment cost of .01 to each Hybrid Class.
    With regard to trading in open outcry, CBOE proposes to amend CBOE 
Rule 8.3 to provide that a Market-Maker has an appointment to trade in 
open outcry in all Hybrid and Hybrid 2.0 Classes traded on the 
Exchange. A Market-Maker would be required to be physically present in 
the trading crowd where an option class is located in order to trade in 
open outcry in that option class. A Market-Maker would be permitted to 
submit electronic quotations into any of his/her appointed Hybrid or 
Hybrid 2.0 Classes while the Market-Maker is trading in open outcry.
    For non-Hybrid and non-Hybrid 2.0 Classes (collectively ``Non-
Hybrid Classes''), CBOE proposes to allow a Market-Maker to select as 
his appointment one or more Non-Hybrid Classes traded on the Exchange, 
which would confer the right to trade in open outcry in Non-Hybrid 
Classes.
    As is the case for RMMs, each membership owned or leased by a 
Market-Maker would have an appointment credit of 1.0. A Market-Maker 
would be permitted to select for each Exchange membership it owns or 
leases any combination of Hybrid 2.0 Classes, Hybrid Classes which are 
located at one trading station, and Non-Hybrid Classes, whose aggregate 
``appointment cost'' does not exceed 1.0. The Exchange would rebalance 
the ``tiers'' (excluding the ``AA'' and ``A+'' tiers) set forth in 
paragraph (c)(i) of CBOE Rule 8.3 once each calendar quarter, which may 
result in additions or deletions to their composition. When a class 
changes tiers, it would be assigned the appointment cost of that tier. 
Upon rebalancing, each Market-Maker with a VTC appointment would be 
required to own or lease the appropriate number of Exchange memberships 
reflecting the revised appointment costs of the Hybrid and Hybrid 2.0 
Classes constituting its appointment.
    In new paragraph (c)(vi) of CBOE Rule 8.3, CBOE proposes to 
continue and modify slightly an existing Pilot Program in effect until 
March 24, 2007, which allows a Market-Maker to quote remotely. The 
existing Pilot Program provides that a Market-Maker may submit 
electronic quotations in his/her appointed Hybrid and Hybrid 2.0 
Classes from outside of his/her appointed trading station.\4\ Because 
CBOE is proposing to allow Market-Makers to create a VTC consisting of 
Hybrid 2.0 Classes, CBOE proposes to modify the Pilot Program such that 
it provides Market-Makers with the ability to quote remotely away from 
CBOE's trading floor in their appointed Hybrid and Hybrid 2.0 option 
classes. While on the trading floor, there would be no requirement that 
a Market-Maker must be present in a particular trading station in order 
to stream electronic quotations into his/her appointed classes.
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    \4\ Prior to the Pilot Program, a Market-Maker could stream 
electronic quotes into an option class only when he/she was 
physically present in his/her appointed trading station.
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    CBOE also proposes to continue two existing Pilot Programs set 
forth in CBOE Rules 8.4(c)(i) and 8.93(vii), which are in effect until 
September 14, 2006, and which provide that an RMM or e-DPM in an option 
class can have one Market-Maker affiliated with the RMM or e-DPM 
trading in the option class. CBOE Rule 8.3(c) would continue to require 
that the affiliated Market-Maker can submit electronic quotations in 
any class in which the affiliated e-DPM or RMM has an appointment only 
if the Market-Maker is present in the trading station where the class 
is located. CBOE also notes in paragraph (c)(vii) to CBOE Rule 8.3 that 
a Market-Maker and an affiliated e-DPM or affiliated RMM can operate as 
multiple aggregation units under the criteria set forth in CBOE Rule 
8.4(c)(ii), pursuant to a Pilot Program that expires on March 14, 2007.
    In new paragraph (c)(viii) to CBOE Rule 8.3, CBOE notes that 
pursuant to a Pilot Program that expires on March 14, 2007, two 
affiliated Market-Makers can hold an appointment in the same class 
provided both Market-Makers operate as multiple aggregation units under 
the criteria set forth in CBOE Rule 8.4(c)(ii). This provision is 
consistent with current CBOE Rule 8.3(c)(iii).
    As provided in new Interpretation .01 to CBOE Rule 8.3, in the 
event the total appointment cost for all of the Hybrid 2.0 Classes, 
Hybrid Classes, and/or Non-Hybrid Classes, constituting a Market-
Maker's appointment on the approval date of this rule change exceed 
1.0, CBOE proposes to grant the Market-Maker six months from the date 
of the approval of this rule change to comply with the provisions of 
CBOE Rule 8.3(c)(v) that provide a Market-Maker's appointed classes 
cannot have a total appointment cost in excess of 1.0. During these six 
months, any Market-Maker whose total appointment cost exceeds 1.0 would 
be ineligible to request an appointment in any other option class until 
the Market-Maker's total appointment cost has been reduced to less than 
1.0. The preceding limited exemption to CBOE Rule 8.3(c)(v) would be 
available only to those Market-Makers whose total appointment cost for 
all of the Hybrid 2.0 Classes, Hybrid Classes, and/or Non-Hybrid 
Classes constituting a Market-Maker's appointment would have exceeded 
1.0 on April 24, 2006, if the rule had been in effect on that date.

[[Page 42693]]

III. Discussion

    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 and, in 
particular, the requirements of Section 6 of the Act \5\ and the rules 
and regulations thereunder.\6\ The Commission specifically finds that 
the proposed rule change is consistent with Section 6(b)(5) of the Act 
\7\ in that it is designed to promote just and equitable principles of 
trade, to remove impediments and to 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 the 
proposal to move to VTC appointments should allow Market-Makers 
additional flexibility in choosing their appointed classes.
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    \5\ 15 U.S.C. 78f.
    \6\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission also believes that the proposed amendments to the 
pilot program that would allow Market-Makers to quote remotely away 
from CBOE's trading floor in their appointed Hybrid and Hybrid 2.0 
option classes, instead of from outside of his/her appointed trading 
station, are a reasonable extension of the pilot. The Commission notes 
that RMMs and e-DPMs in an option class would continue to be permitted, 
on a pilot basis, to have an affiliated Market-Maker in that class. 
CBOE Rule 8.3(c) would continue to require that the affiliated Market-
Maker can submit electronic quotations in any class in which the 
affiliated e-DPM or RMM has an appointment only if the Market-Maker is 
present in the trading station where the class is located. The 
Commission believes that requiring that the Market-Maker affiliated 
with the e-DPM or RMM be present in the trading station where the class 
is located is reasonable, given the allocation algorithm adopted by the 
Exchange.
    The Commission also notes that Market-Makers and affiliated RMMs or 
e-DPMs would continue to be permitted, on a pilot basis, to operate as 
multiple aggregation units under the criteria set forth in CBOE Rule 
8.4(c)(ii). In addition, the Commission notes that two affiliated 
Market-Makers would continue to be permitted to hold an appointment in 
the same class provided both Market-Makers operate as multiple 
aggregation units under the criteria set forth in CBOE Rule 8.4(c)(ii). 
However, an affiliated Market-Maker and DPM would not be permitted to 
hold an appointment in the same class.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-2006-51) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-11987 Filed 7-26-06; 8:45 am]

BILLING CODE 8010-01-P
