

[Federal Register: November 16, 2006 (Volume 71, Number 221)]
[Notices]               
[Page 66808-66810]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16no06-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54729; File No. SR-CBOE-2006-83]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Complex Orders

November 8, 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 October 20, 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 the proposed rule change 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\ 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 requested that the Commission waive the 30-day 
operative delay, as specified 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 amend its rules regarding the execution of 
complex orders to clarify that the legs of stock-option and security 
future-option orders may be executed in penny increments. The CBOE also 
proposes various non-substantive changes designed to simplify the text 
of several rules. The text of the proposed rule change is available on 
the Exchange's Web site (http://www.cboe.com), at the Exchange's Office 

of the Secretary, and at the Commission's Public Reference Room.

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
    CBOE Rule 6.42(3), ``Minimum Increments for Bids and Offers,'' 
currently provides that complex orders may generally be expressed on a 
net price basis in any increment, regardless of the minimum increment 
otherwise appropriate to the individual legs of the order.\6\ Thus, for 
example, a complex order could be entered at a net debit or credit 
price of $1.03 even though the minimum increment for the individual 
series is generally $0.05 or $0.10.\7\ After a complex order has been 
executed at the total net debit or credit price, the contract 
quantities and prices for each individual component leg of the trade 
are reported as executions. In this regard, CBOE Rule 6.42(3) currently 
provides that the legs of a complex order may be executed in one-cent 
increments, regardless of the minimum increments otherwise appropriate 
to the individual legs of the order.
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    \6\ A minimum trading increment is defined in CBOE Rule 6.42 as 
$0.05 if the options contract is trading at less than $3.00 and 
$0.10 if the options contract is trading at or above $3.00.
    \7\ As an exception to this provision, CBOE Rule 6.42(3) 
provides that complex orders in options on the S&P 500 Index 
(``SPX'') and the S&P 100 Index (``OEX'') that are not box spreads 
are to be expressed in decimal increments no smaller than $0.05. A 
``box spread'' (also referred to as a ``box/roll spread'') means 
``an aggregation of positions in a long call option and short put 
option with the same exercise price (`buy side') coupled with a long 
put option and short call option with the same exercise price (`sell 
side') all of which have the same aggregate current underlying 
value, and are structured as either: (A) a `long box spread' in 
which the sell side exercise price exceeds the buy side exercise 
price or (B) a `short box spread' in which the buy side exercise 
price exceeds the sell side exercise price.'' See CBOE Rule 6.42, 
Interpretation and Policy .05, and CBOE Rule 6.53C(a)(7).
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    With respect to the types of complex orders that may be expressed 
in net price increments and reported in one-cent increments as 
described above, the rule text currently refers to spreads, straddles, 
and combinations as defined in CBOE Rule 6.53, ``Certain Types of 
Orders Defined,'' and any other type of complex order defined in CBOE 
Rule 6.53C, ``Complex Orders on the Hybrid System.'' The purpose of the 
proposed rule change is to clarify that the options leg of a stock-
option or security future-option order, as defined in CBOE Rules

[[Page 66809]]

1.1(ii)(a) and 1.1(zz)(a),\8\ respectively (collectively ``Type A'' 
orders), also may be executed in one-cent increments.\9\ While there 
are already references to both Type A and Type B stock-option and 
security future-option orders in the Exchange's priority rules 
applicable to complex orders,\10\ the Exchange believes that making the 
proposed clarification in the text of CBOE Rule 6.42(3) should help to 
avoid any confusion as to the applicable increments for reporting the 
execution of any options leg of Type A stock-option and security 
future-option orders. The Exchange believes that this clarification is 
consistent with Rule 722 of the International Securities Exchange 
(``ISE''), which permits complex orders, as defined in ISE Rule 722, to 
be executed in penny increments.\11\
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    \8\ A ``stock-option order'' is defined as ``an order to buy or 
sell a stated number of units of an underlying or a related security 
coupled with either (a) The purchase or sale of option contract(s) 
on the opposite side of the market representing either the same 
number of units of the underlying or related security or the number 
of units of the underlying security necessary to create a delta 
neutral position or (b) the purchase or sale of an equal number of 
put and call option contracts, each having the same exercise price, 
expiration date and each representing the same number of units of 
stock as, and on the opposite side of the market from, the 
underlying or related security portion of the order.'' See CBOE Rule 
1.1(ii). A ``security future-option order'' is defined as ``an order 
to buy or sell a stated number of units of a security future or a 
related security convertible into a security future (`convertible 
security future') coupled with either (a) The purchase or sale of 
option contract(s) on the opposite side of the market representing 
either the same number of the underlying for the security future or 
convertible security future or the number of units of the underlying 
for the security future or convertible security future necessary to 
create a delta neutral position or (b) the purchase or sale of an 
equal number of put and call option contracts, each having the same 
exercise price, expiration date and each representing the same 
number of the underlying for the security future or convertible 
security future, as and on the opposite side of the market from, the 
underlying for the security future or convertible security future 
portion of the order.'' See CBOE Rule 1.1(zz).
    \9\ CBOE Rule 6.42(3) already contains a cross-reference to 
conversions and reversals (collectively ``Type B'' orders). A 
conversion (reversal) order is an order involving the purchase 
(sale) of a put option and the sale (purchase) of a call option in 
equivalent units with the same strike price and expiration in the 
same underlying security, and the purchase (sale) of the related 
instrument. See CBOE Rule 6.53C(a)(9). This definition is also 
referenced in CBOE Rules 1.1(ii)(b) and 1.1(zz)(b).
    \10\ CBOE Rule 6.45(e) pertains to the priority of complex 
orders executed in non-Hybrid Trading System (``Hybrid'') options 
classes. CBOE Rule 6.45A(b)(iii) pertains to the priority of complex 
orders in Hybrid equity options classes. CBOE Rule 6.45B(b)(iii) 
pertains to the priority of complex orders in Hybrid index and 
exchange-traded fund option classes.
    \11\ See ISE Rule 722(b)(1).
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    The Exchange also notes that under CBOE rules, a stock-option order 
or security future-option order may be executed at a total credit or 
debit price without giving priority to bids (offers) established in the 
trading crowd but not over bids (offers) in the public customer limit 
order book. While CBOE is proposing to clarify that the options leg of 
a Type A stock-option or security future-option order may be executed 
in penny increments, it is not proposing to change the existing 
requirement that to have priority over public customer limit orders, 
the options leg of the order must trade at a price that is better than 
the corresponding bid (offer) by at least one minimum trading 
increment. Thus, public customer limit orders will maintain their 
existing priority.
    Finally, the Exchange is proposing various non-substantive changes 
in an effort to simplify the existing text of several rules. First, 
rather than list out the various types of complex orders, the Exchange 
proposes to add a definition of a ``complex order'' in Interpretation 
and Policy .01 to CBOE Rule 6.42.\12\ The Exchange also proposes to add 
corresponding cross-references to this definition in other CBOE 
rules.\13\ Second, the Exchange proposes to add a reference to CBOE 
Rule 6.42(3) to clarify that, except as otherwise provided in CBOE Rule 
6.53C, a complex order may be expressed in any increment.\14\ Third, 
the Exchange proposes to replace rule text in CBOE Rule 6.42(3), 
regarding the priority applicable to complex orders that are not net 
priced in a multiple of the minimum increment, with a cross-reference 
to the applicable priority requirements described in other CBOE rules, 
and to add a reference to certain of the Exchange's applicable complex 
order priority rules providing that at least one leg of a complex order 
must better the corresponding bid (offer) in the public customer limit 
order book by at least one minimum trading increment as defined in CBOE 
Rule 6.42 (i.e., $0.05 or $0.10, as applicable). The Exchange believes 
that this proposed change to the rule text is substantively the same as 
one recently made by the ISE.\15\ Finally, CBOE Rule 6.42 is being 
revised to clarify that the terms ``box/roll spread'' and ``box 
spread,'' both of which are used in the CBOE's rules, have the same 
meaning.\16\
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    \12\ For purposes of the rule, ``complex order'' shall mean a 
spread, straddle, combination, or ratio order as defined in CBOE 
Rule 6.53, a stock-option order as defined in CBOE Rule 1.1(ii), a 
security future-option order as defined in CBOE Rule 1.1(zz), or any 
other complex order as defined in CBOE Rule 6.53C. See CBOE Rule 
6.42(3), Interpretation and Policy .01.
    \13\ The Exchange notes that the definition of a ``complex 
order'' for purposes of CBOE's priority rules is different from the 
definition of a ``complex trade'' for purposes of the options 
intermarket linkage requirements described in CBOE Rules 6.80, 
``Definitions,'' and 6.83, ``Order Protection.'' Under the options 
intermarket linkage-related rules, a ``complex trade'' means the 
execution of an order in an options series in conjunction with the 
execution of one or more related order(s) in different options 
series in the same underlying security occurring at or near the same 
time for the equivalent number of contracts and for the purpose of 
executing a particular investment strategy. See CBOE Rules 6.80(4) 
and 6.83(b)(7).
    \14\ CBOE Rule 6.53C provides that the net price increment 
applicable to complex orders that are routed to the electronic 
complex order book (``COB'') will be either a multiple of the 
minimum increment (i.e., $0.05 or $0.10, as applicable) or a one 
cent increment, as determined on a class-by-class basis.
    \15\ See ISE Rule 722 and Securities Exchange Act Release No. 
54124 (July 11, 2006), 71 FR 40567 (July 17, 2006) (order approving 
File No. SR-ISE-2005-49).
    \16\ See supra note 7.
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2. Statutory Basis
    The Exchange believes that the basis under the Act for the proposed 
rule change is the requirement under Section 6(b)(5) of the Act \17\ 
that a national securities exchange have rules that are designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to 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 Exchange believes that the proposed rule change will provide 
investors with more flexibility in pricing stock-option orders and 
security future-option orders and will increase the opportunity for 
such orders to be executed.
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    \17\ 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 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

[[Page 66810]]

protection of investors and the public interest. In addition, as 
required under Rule 19b-4(f)(6)(iii),\18\ 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 \19\ and 
Rule 19b-4(f)(6) thereunder.\20\
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    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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 because the CBOE 
believes that the proposal is substantially similar to ISE Rule 722 and 
because the proposal clarifies the applicable reporting increments for 
the options leg of stock-option and security future-option orders. 
Accordingly, the CBOE believes that its proposal presents no novel 
issues and that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the proposal will allow stock-option orders and security 
future-option orders, like other types of complex orders, to be 
executed in penny increments. Allowing stock-option and security 
future-option orders to be executed in penny increments could 
facilitate the execution of such orders by increasing the number of 
price points at which these orders may be executed. For these reasons, 
the Commission designates that the proposed rule change become 
operative immediately.
    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:

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-2006-83 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-2006-83. 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/[fxsp0]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-2006-83 and should be submitted on or before December 7, 2006.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
Nancy M. Morris,
Secretary.
[FR Doc. E6-19378 Filed 11-15-06; 8:45 am]

BILLING CODE 8011-01-P
