

[Federal Register: February 13, 2007 (Volume 72, Number 29)]
[Notices]               
[Page 6796-6797]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe07-78]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55246; File No. SR-CBOE-2006-62]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change as 
Modified by Amendment No. 1 Thereto Relating to Its Index Obvious Error 
Rule

February 6, 2007.

I. Introduction

    On July 7, 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 amend CBOE Rule 24.16, which 
is the Exchange's rule applicable to the nullification and adjustment 
of transactions in index options, options on exchange-traded funds 
(``ETFs''), and options on HOLDing Company Depository ReceiptS 
(``HOLDRS''). On October 30, 2006, the CBOE submitted Amendment No. 1 
to the proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on December 20, 2006.\3\ 
The Commission received no comment letters on the proposal. This order 
approves the proposed rule change as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 54926 (December 13, 
2006), 71 FR 76393.
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II. Description of the Proposed Rule Change

    The Exchange is proposing to amend Rule 24.16 in order to: (i) re-
define what constitutes an ``obvious price error;'' (ii) provide for a 
Market-Maker to Market-Maker adjustment of obvious price errors 
(currently such erroneous transactions are subject to nullification); 
(iii) eliminate the nullification and adjustments provisions for 
erroneous quantity errors; and (iv) make various non-substantive 
changes to the text of Rule 24.16.
    Specifically, an ``obvious price error'' would be deemed to have 
occurred for series trading with normal bid-ask differentials as 
established in CBOE Rule 8.7(b)(iv) when the execution price of a 
transaction is above or below the ``fair market value''\4\ of the 
option by at

[[Page 6797]]

least: $0.125 for options trading under $2; $0.20 for options trading 
at or above $2 and up to $5; $0.25 for options trading above $5 and up 
to $10; $0.40 for options trading above $10 and up to $20; and $0.50 
for options trading above $20. For series trading with bid-ask 
differentials that are a multiple of the widths established in Rule 
8.7(b)(iv), the prescribed error amount would have the same multiple 
applied to the amounts prescribed above.
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    \4\ Fair market value is defined in Rule 24.16 as the midpoint 
of the national best bid and national best offer for the series 
(across all exchanges trading the option). In multiply listed 
issues, if there are no quotes for comparison purposes, fair market 
value shall be determined by Trading Officials. For singly-listed 
issues and for transactions occurring as part of the Rapid Opening 
System (``ROS trades'') or Hybrid Opening System (``HOSS''), the 
Exchange clarified in the proposed rule change that the fair market 
value shall be the midpoint of the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s).
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    Second, the proposal revises the obvious price error provision as 
it relates to the handling of transactions involving only CBOE Market-
Makers. Under the current rule, such erroneous price transactions are 
nullified. Under the proposal, CBOE-Market-Maker-to-CBOE-Market-Maker 
transactions would be subject to adjustment. In applying the proposed 
CBOE Market-Maker adjustment provision to index options and options on 
ETFs or HOLDRs, the adjustment price would be equal to the fair market 
value of the option minus the minimum error amount in the case of an 
erroneous sell transaction or the fair market value plus the minimum 
error amount in the case of an erroneous buy transaction. If the 
adjusted price is not in a multiple of the applicable minimum trading 
increment, the adjusted price would be rounded down (up) to the next 
price that is a multiple of the applicable minimum trading increment 
with respect to an erroneous sell (buy) transaction.
    Third, the proposal would eliminate obvious quantity errors as a 
type of transaction that is subject to obvious error review. The 
elimination of this provision is consistent with the Exchange's current 
rule for equity options, which does not have an obvious error review 
for quantity errors.\5\
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    \5\ See CBOE Rule 6.25(a).
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    Lastly, the proposal would make various non-substantive changes to 
CBOE Rule 24.16, such as making cross-reference updates to correspond 
to the above-described revisions, changing the title of the rule to 
reflect its application to options on ETFs and HOLDRS (currently the 
title only references index options), clarifying that fair market value 
is to be determined by Exchange Trading Officials in accordance with 
the provisions of the definition of fair market value, and making other 
technical changes.

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 \6\ and, in 
particular, the requirements of Section 6(b) of the Act \7\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\8\ in 
that the proposal promotes just and equitable principles of trade, 
prevents fraudulent and manipulative acts, removes impediments to and 
perfects the mechanism of a free and open market and a national market 
system, and, in general, protects investors and the public interest.
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    \6\ In approving this proposal, the Commission 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).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
price of the executed trade indicates an ``obvious error'' may exist, 
suggesting that it is unrealistic to expect that the parties to the 
trade had come to a meeting of the minds regarding the terms of the 
transaction. In the Commission's view, the determination of whether an 
``obvious error'' has occurred should be based on specific and 
objective criteria and subject to specific and objective procedures. 
The revised scale for identifying the minimum error amount for an 
obvious price error and the elimination of obvious quantity errors set 
out a clear and objective methodology for determining when an obvious 
error has occurred. The proposed amendments with respect to obvious 
error transactions involving only CBOE Market Makers also establish 
specific and objective criteria governing the adjustment of such 
trades. In addition, the technical conforming and clarifying changes 
made by the proposed rule change, including the clarification with 
respect to the role of Trading Officials, should help facilitate 
understanding and application of CBOE Rule 24.16. Therefore, the 
Commission believes that the proposed rule change is consistent with 
the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2006-62), as modified by 
Amendment No. 1, be, and it hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-2405 Filed 2-12-07; 8:45 am]

BILLING CODE 8010-01-P
