

[Federal Register: May 3, 2007 (Volume 72, Number 85)]
[Notices]               
[Page 24639-24646]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my07-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[(Release No. 34-55674; File No. SR-CBOE-2006-101]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change as Modified by 
Amendment Nos. 1 and 2 Thereto To Amend CBOE's Rules To Reflect the 
Migration of Its TPF Technology Platform Over to the Existing 
CBOEdirect Technology Platform.

April 26, 2007.
    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 November 30, 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 substantially prepared 
by the Exchange. The Exchange submitted Amendment No. 1 to the proposed 
rule change on February 15, 2007. The Exchange submitted Amendment No. 
2 to the proposed rule change on April 13, 2007.\3\ The Commission is 
publishing this notice and order to solicit comments on the proposal, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 replaced and superseded Amendment No. 1 and 
the original filing in their entireties.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CBOE's rules to reflect the 
migration of its TPF technology platform over to the existing 
CBOEdirect technology platform. The text of the proposed rule change, 
incorporating Amendment Nos. 1 and 2, is set forth below. Proposed new 
language is in italics; proposed deletions are in brackets.
Chicago Board Options Exchange, Incorporated
Rules
* * * * *

CHAPTER I Definitions

Rule 1.1. Definitions

    When used in these Rules, unless the context otherwise requires:
    (a) Any term defined in Article I of the Constitution and not 
otherwise defined in this Chapter shall have the meaning assigned to 
such term in such Article I.

Hybrid Trading System

    (aaa) ``Hybrid Trading System'' refers to the Exchange's trading 
platform that allows individual Market-Makers to submit electronic 
quotes in their appointed classes. `` Hybrid 2.0 Platform'' is an 
enhanced trading platform that allows remote quoting by authorized 
categories of members. ``Hybrid 3.0 Platform'' is an electronic trading 
platform on the Hybrid Trading System that allows a single quoter to 
submit an electronic quote which represents the aggregate Market-Maker 
quoting interest in a series for the trading crowd. Classes authorized 
by the Exchange for trading on the Hybrid Trading System shall be 
referred to as Hybrid Classes. Classes authorized by the Exchange for 
trading on the Hybrid 2.0 Platform shall be referred to as Hybrid 2.0 
Classes. Classes authorized by the Exchange for trading on the Hybrid 
3.0 Platform shall be referred to as Hybrid 3.0 Classes. References to 
``Hybrid,'' ``Hybrid System,'' or ``Hybrid Trading System'' in the 
Exchange's

[[Page 24640]]

Rules shall include all platforms unless otherwise provided by rule.
* * * * *

Rule 6.2B. Hybrid Opening System (``HOSS'')

    (a) For a period of time before the opening of trading in the 
underlying security (or in the case of index options, prior to 8:30 
a.m., CT), as determined by the appropriate Procedure Committee and 
announced to the membership via Regulatory Circular, the Hybrid System 
will accept orders and quotes. The Hybrid System will disseminate to 
market participants (as defined in Rule 6.45A or 6.45B) information 
about resting orders in the Book that remain from the prior business 
day and any orders submitted before the opening. At a randomly selected 
time within a number of seconds after the primary market for the 
underlying security disseminates the opening trade or the opening quote 
(or after 8:30 a.m. for index options unless unusual circumstances 
exist), the System initiates the opening procedure and sends a notice 
(``Opening Notice'') to market participants who may then submit their 
opening quotes. The DPM or any appointed LMM and each e-DPM for the 
class must enter opening quotes. Spread orders and contingency orders 
do not participate in the opening trade or in the determination of the 
opening price.
    (b)-(h) No Change.

* * * Interpretations and Policies

    .01 Not withstanding Paragraph (a), for purposes of Hybrid 3.0 
Classes, the following shall apply:
    (a) Only the DPM or LMM will be required to enter opening quotes in 
opening rotations. Public customers, broker-dealers, Exchange Market-
Makers, away Marker-Makers and Specialists will not be permitted to 
enter opening quotes but may enter opening orders in opening rotations.
    (b) The DPM or LMM must enter opening quotes that comply with the 
legal quote width requirements of Rule 8.7(b)(iv). If there is not a 
quote present in a series that complies with the legal quote width 
requirements of Rule 8.7(b)(iv), then that series will not open.
    (c) All provisions set forth in Rule 6.2B shall remain in effect 
unless superseded or modified by this Rule 6.2B.01. To facilitate the 
calculation of a settlement price for futures and options contracts on 
volatility indexes, the Exchange shall utilize a modified HOSS opening 
procedure for any index option series with respect to which a 
volatility index is calculated. This modified HOSS opening procedure 
will be utilized only on the final settlement date of the options and 
futures contracts on the applicable volatility index in each expiration 
month.
    On the final settlement day for options and futures on a volatility 
index, public customers, broker-dealers, Exchange Market-Makers, away 
Marker-Makers and Specialists may enter orders in any index options 
series used to calculate the final settlement price of that volatility 
index (``modified HOSS opening procedures''). The following provisions 
shall be applicable for an index option with respect to which a 
volatility index is calculated:
    (i) All orders (including public customer, broker-dealer, Exchange 
Market-Maker, away Market-Maker and Specialist orders), other than 
spread or contingency orders, will be eligible to be placed on the 
electronic book for those option contract months whose prices are used 
to derive the volatility indexes on which options and futures are 
traded, for the purpose of permitting those orders to participate in 
the opening price calculation for the applicable index option series.
    (ii) In addition to the LMM quoting requirement, all LMMs, if 
applicable, shall be required to enter opening orders during the 
modified HOSS opening procedures.
    (iii) All index option orders for participation in the modified 
HOSS opening procedure that are related to positions in, or a trading 
strategy involving, volatility index options or futures, and any change 
to or cancellation of any such order:
    (A) must be received prior to 8:00 a.m. (CT), and
    (B) may not be cancelled or changed after 8:00 a.m. (CT), unless 
the order is not executed in the modified HOSS opening procedure and 
the cancellation or change is submitted after the modified HOSS opening 
procedure is concluded (provided that any such order may be changed or 
cancelled after 8:00 a.m. (CT) and prior to applicable cut-off time 
established in accordance with paragraph (iv) in order to correct a 
legitimate error, in which case the member submitting the change or 
cancellation shall prepare and maintain a memorandum setting forth the 
circumstances that resulted in the change or cancellation and shall 
file a copy of the memorandum with the Exchange no later than the next 
business day in a form and manner prescribed by the Exchange).
    In general, the Exchange shall consider index option orders to be 
related to positions in, or a trading strategy involving, volatility 
index options or futures for purposes of this Rule 6.2B.01(c) if the 
orders possess the following three characteristics:
    (1) The orders are for options series with the expiration month 
that will be used to calculate the settlement price of the applicable 
volatility index option or futures contract.
    (2) The orders are for options series spanning the full range of 
strike prices in the appropriate expiration month for options series 
that will be used to calculate the settlement price of the applicable 
volatility index option or futures contract, but not necessarily every 
available strike price.
    (3) The orders are for put options with strike prices less than the 
``at-the-money'' strike price and for call options with strike prices 
greater than the ``at-the-money'' strike price. The orders may also be 
for put and call options with ``at-the-money'' strike prices.
    Whether index option orders are related to positions in, or a 
trading strategy involving, volatility index options or futures for 
purposes of this Rule 6.2B.01(c) depends upon specific facts and 
circumstances. Order types other than those provided above may also be 
deemed by the Exchange to fall within this category of orders if the 
Exchange determines that to be the case based upon the applicable facts 
and circumstances.
    The provisions of this Rule 6.2B.01(c) may be suspended by two 
Floor Officials in the event of unusual market conditions.
    (iv) All other index option orders for participation in the 
modified HOSS opening procedures, and any change to or cancellation of 
any such order, must be received prior to the applicable cut-off time 
in order to participate at the opening price for the applicable index 
option series. The applicable cut-off time for the affected index 
option series will be established by the appropriate Procedure 
Committee on a class-by-class basis, provided the cut-off time will be 
no earlier than 8:25 a.m. (CT) and no later than the opening of trading 
in the option series. All pronouncements regarding changes to the 
applicable cut-off time will be announced to the membership via 
Regulatory Circular that is issued at least one day prior to 
implementation.
    (v) The HOSS system shall automatically generate cancels 
immediately prior to the opening of the applicable index option series 
for broker-dealer, Exchange Market-Maker, away Market-Maker, and 
Specialist orders which remain on the electronic book following the 
modified HOSS opening procedures.
    (vi) Any imbalance of contracts to buy over contracts to sell in 
the applicable

[[Page 24641]]

index option series, or vice versa, as indicated on the electronic 
book, will be published as soon as practicable up through the opening 
bell on days that the modified HOSS opening procedures is utilized.
* * * * *

Rule 6.13. CBOE Hybrid System's Automatic Execution Feature

    (a) No Change.
    (b) Automatic Execution
    (i) Eligibility: Eligibility: Orders eligible for automatic 
execution through the CBOE Hybrid System may be automatically executed 
in accordance with the provisions of this Rule or in accordance with 
Rule 6.13A for classes that have been designated for auction price 
improvement. This section governs automatic executions and split-price 
automatic executions. The automatic execution and allocation of orders 
or quotes submitted by market participants also is governed by Rules 
6.45A (c) and (d) and Rules 6.45B (c) and (d).
    (A)(1) Eligible Order Size: The appropriate Procedure Committee 
shall establish on a class-by-class basis the maximum size of orders 
entitled to receive automatic execution through the CBOE Hybrid System. 
If the eligible order size exceeds the disseminated size, incoming 
eligible orders shall be entitled to receive an automatic execution up 
to the disseminated size.
    (A)(2) Hybrid 3.0 Eligibility and Process: For Hybrid 3.0 Classes, 
all eligible orders will receive automatic execution against public 
customer orders in the electronic book. Any remaining balance of the 
order may be represented in the electronic book provided such order is 
eligible for book entry pursuant to Rule 7.4. If the order is not 
eligible for book entry, or at the order entry firm's discretion, the 
order will route to PAR, BART, or the order entry firm's booth printer.
    (B) Orders Not Eligible for Automatic Execution: Orders not 
eligible for automatic execution will route on a class by class basis 
to PAR, BART, or at the order entry firm's discretion to the order 
entry firm's booth printer.
    (C) Access:
    (i) For Hybrid and Hybrid 2.0 classes, non-broker-dealer public 
customers and broker-dealers that are not Market-Makers or specialists 
on an exchange who are exempt from the provisions of Regulation T of 
the Federal Reserve Board pursuant to Section 7(c)(2) of the Securities 
Exchange Act of 1934 (``non-Market-Maker or non-Specialist broker-
dealers'') are eligible for automatic execution. The eligible order 
size for these classifications must be the same. For Hybrid 3.0 
classes, non-broker-dealer public customer orders are eligible for 
automatic execution, and the appropriate Procedure Committee may 
determine, on a class by class basis, to allow non-Market-Maker or non-
Specialist broker-dealer orders to be eligible for automatic execution. 
The eligible order size for these classifications must be the same.
    (ii) No Change.
    (iii) No Change.
    (ii) Process: For Hybrid and Hybrid 2.0 classes, [E]eligible orders 
of a size equal to or less than the size of the disseminated CBOE BBO 
shall be executed in the manner described in paragraph 6.13(b). Inbound 
eligible orders of a size greater than the disseminated size will 
automatically execute in part, as described below in paragraph 
6.13(b)(iii) (Split Price Executions). Orders executed automatically 
shall be allocated to contra side trading interest pursuant to Rule 
6.45A or 6.45B.
    (iii) Split Price Executions: For Hybrid and Hybrid 2.0 classes, 
[I]incoming eligible orders of a size greater than the disseminated 
size shall receive an automatic execution for a size up to the 
disseminated size. The balance of the order if marketable, will 
automatically execute at the revised disseminated price provided the 
revised disseminated price represents the NBBO (if the revised price is 
inferior to NBBO the balance of the order will route to PAR). If not 
marketable, the balance of the order will be automatically represented 
in the electronic book provided such order is eligible for book entry 
pursuant to Rule 7.4. If the order is not eligible for book entry, it 
will route to PAR, BART, or at the order entry firm's discretion to the 
order entry firm's booth printer. Pronouncements pursuant to this 
provision shall be made by the appropriate Procedure Committee and 
announced via Regulatory Circular.
    (iv) No Change.
    (c)-(e) No Change.
* * * * *

Rule 6.14. Hybrid Agency Liaison (HAL)

    This Rule governs the operation of the Hybrid Agency Liaison 
(``HAL'') system. HAL is a feature within the Hybrid System that 
provides automated order handling in designated classes trading on 
Hybrid [option classes] for qualifying electronic orders that are not 
automatically executed by the Hybrid System.
    (a)-(d) No Change.

* * * Interpretations and Policies

    No Change.
* * * * *

Rule 6.43. Manner of Bidding and Offering

    (a) No Change.
    (b) Except for Hybrid and Hybrid 2.0 classes designated for trading 
on the CBOE Hybrid System, members of the trading crowd may verbalize 
quotes (``manual quotes'') to be input into Exchange systems by quote 
reporters for dissemination to the Options Price Reporting Authority 
(``OPRA''). Manual quotes must be for a minimum size of five (5) 
contracts. A manual quote will remain as the Exchange's disseminated 
quote until executions deplete the size, until the market maker or 
floor broker withdraws the quote, or until matched or improved by 
Autoquote or improved by an order in the electronic Book.
    (i) For Hybrid 3.0 classes, if market participants as defined in 
Rule 6.45B are eligible to submit orders for entry into the electronic 
book pursuant to Rule 7.4(a)(1)(i), then the appropriate Procedure 
Committee may determine to disable manual quotes.
    (ii) For Hybrid 3.0 classes, automatic execution against a manual 
quote will not be permissible. However, in accordance with Rule 6.13 
automatic execution against public customer orders in the electronic 
book will be permissible when the electronic book matches a manual 
quote.
* * * * *

Rule 6.45B--Priority and Allocation of Trades in Index Options and 
Options on ETFs on the CBOE Hybrid System

    No Change.
    (a)-(c) No Change.
    (d) Quotes Interacting with Quotes.
    (i) In the event that a Market-Maker's disseminated quotes interact 
with the disseminated quote(s) of other Market-Makers, resulting in the 
dissemination of a ``locked'' quote (e.g., $1.00 bid--1.00 offer), the 
following shall occur:
    (A) No Change.
    (B) No Change.
    (C) When the market locks, a ``counting period'' will begin during 
which Market-Makers whose quotes are locked may eliminate the locked 
market. Provided, however, that in accordance with subparagraph (A) 
above a Market-Maker will be obligated to execute customer and broker-
dealer orders eligible for automatic execution pursuant to Rule 6.13 at 
his disseminated quote in accordance with Rule 8.51. If at the end of 
the counting period the quotes remain locked, the locked quotes will 
automatically

[[Page 24642]]

execute against each other in accordance with the allocation algorithm 
described above in Rule 6.45B(a). The length of the counting period 
will be established by the appropriate Procedure Committee, may vary by 
product, and will not exceed one second. For Hybrid 3.0 Classes, the 
length of the counting period will be established by the appropriate 
Procedure Committee, may vary by class, and shall not exceed ten 
seconds.
    (ii) No Change.

* * * Interpretations and Policies

    .01 Principal Transactions: Order entry firms may not execute as 
principal against orders they represent as agent unless: (i) agency 
orders are first exposed on the Hybrid System for at least three (3) 
seconds, (ii) the order entry firm has been bidding or offering for at 
least three (3) seconds prior to receiving an agency order that is 
executable against such bid or offer, or (iii) the order entry firm 
proceeds in accordance with the crossing rules contained in Rule 6.74.
    .02 Solicitation Orders. Order entry firms must expose orders they 
represent as agent for at least three (3) seconds before such orders 
may be executed electronically via the electronic execution mechanism 
of the Hybrid System, in whole or in part, against orders solicited 
from members and non-member broker-dealers to transact with such 
orders.
    .03 For purposes of Interpretations .01 and .02, the minimum 
exposure time for Hybrid 3.0 Classes shall be determined by the 
appropriate Procedure Committee, on a class by class basis, provided 
the minimum exposure time must be at least 3 seconds but shall not 
exceed 30 seconds.
* * * * *

Rule 7.4. Obligations for Orders

    (a) Eligibility and Acceptance:
    (1) Eligibility: Public customer orders are eligible for entry into 
the electronic book. Market participants, as defined in Rule 6.45A or 
6.45B in Hybrid and Hybrid 2.0 Classes shall be eligible to submit 
orders for entry into the book. The appropriate Procedure Committee may 
determine on an issue-by-issue basis that the following types of orders 
may also be eligible for entry into the electronic book:
    (i) Orders submitted by market participants, as defined in Rule 
6.45B, in Hybrid 3.0 Classes;
    (ii) No Change.
    (iii) No Change.
    (2) No Change.
    (b)-(f) No Change.

* * * Interpretations and Policies

    .01-.06 No Change.
* * * * *

Rule 8.3. Appointment of Market-Makers

    This Rule governs the appointment of Market-Makers other than 
Remote Market-Makers. Rule 8.4 governs the appointment of Remote 
Market-Makers.
    (a) No Change.
    (b) No Change.
    (c) Absent an exemption from the Exchange, an appointment of a 
Market-Maker confers the right to quote as below:
    (i)-(iii) No Change.
    (iv) Hybrid 3.0, Non-Hybrid and Non-Hybrid 2.0 Classes (for 
purposes of this rule, collectively ``Non-Hybrid Classes''). In 
addition to paragraphs (i) through (iii) above, and subject to 
paragraph (v) below, a Market-Maker can select as his appointment one 
or more Non-Hybrid Classes traded on the Exchange, which confers the 
right to trade in open outcry in an appropriate number of Non-Hybrid 
Classes as described below. Each Non-Hybrid Class will be assigned an 
``appointment cost'', which are set forth below.
    (v)-(viii) No Change.

* * * Interpretations and Policies

    .01 No Change.
* * * * *

Rule 8.7. Obligations of Market-Makers

    (a) No Change.
    (b) Appointment. With respect to each class of option contracts for 
which he holds an Appointment under Rule 8.3, a Market-Maker has a 
continuous obligation to engage, to a reasonable degree under the 
existing circumstances, in dealings for his own account when there 
exists, or it is reasonably anticipated that there will exist, a lack 
of price continuity, a temporary disparity between the supply of and 
demand for a particular option contract, or a temporary distortion of 
the price relationships between option contracts of the same class. 
Without limiting the foregoing, a Market-Maker is expected to perform 
the following activities in the course of maintaining a fair and 
orderly market:
    (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) Opening Rotations. The provisions of Rule 8.7(b)(iv)(A) shall 
apply during the applicable opening rotation employed in all 
classes.[Hybrid classes, Hybrid 2.0 classes, and Non-Hybrid and Non-
Hybrid 2.0 classes.]
    (C) Option Classes Trading on the Hybrid Trading System. Except as 
provided in subparagraphs (i) and (ii) below, option classes trading on 
the Hybrid Trading System 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.
    i.-ii. No Change.
    (c) No Change.
    (d) Market Making Obligations in Applicable Hybrid and Hybrid 2.0 
Classes
    The following obligations in this paragraph (d) are only applicable 
to Market-Makers trading classes on the CBOE Hybrid System and only in 
those Hybrid and Hybrid 2.0 classes. As such, this paragraph has no 
applicability to non-Hybrid classes. This paragraph is not applicable 
to Remote Market-Makers, who instead will be subject to the obligations 
imposed by Rule 8.7(e). Unless otherwise provided in this Rule, Market-
Makers trading classes on the Hybrid System remain subject to all 
obligations imposed by CBOE Rule 8.7. To the extent another obligation 
contained elsewhere in Rule 8.7 is inconsistent with an obligation 
contained in paragraph (d) of Rule 8.7 with respect to a class trading 
on Hybrid, this paragraph (d) shall govern trading in the Hybrid class.
    These requirements are applicable on a per class basis depending 
upon the percentage of volume a Market-Maker transacts electronically 
versus in open outcry. With respect to making this determination, the 
Exchange will monitor Market-Makers' trading activity every calendar 
quarter to determine whether they exceed the thresholds established in 
paragraph (d)(i). If a Market-Maker exceeds the threshold established 
below, the obligations contained in (d)(ii) will be effective the next 
calendar quarter.
    For a period of ninety (90) days commencing immediately after a 
class begins trading on the Hybrid system, the provisions of paragraph 
(d)(i) shall govern trading in that class.
    (i) No Change.
    (ii) No Change.

* * * Interpretations and Policies

    .01-.02 No Change.
    .03 For purposes of Rule 8.7, the following percentage requirements 
apply to Market-Maker trading activity for each quarter of a calendar 
year, except for unusual circumstances as determined by the appropriate 
Market Performance Committee. The appropriate Market Performance

[[Page 24643]]

Committee may assign a weighting factor based on volume to one or more 
classes or series of option contracts in connection with these 
requirements.
    A. No Change.
    B. In-Person Requirements for Market-Makers in non-Hybrid and 
Hybrid 3.0 Classes: Respecting the manner in which Market-Maker 
transactions may be executed in non-Hybrid and Hybrid 3.0 classes, a 
Market-Maker must execute in person, and not through the use of orders, 
at least 25 percent of his total transactions, provided, however, that 
for any calendar quarter in which a Market-Maker receives Market-Maker 
treatment for off-floor orders in accordance with Rule 8.1, in addition 
to satisfying the requirements of paragraph A of this Interpretation 
.03, the Market-Maker must execute in person, and not through the use 
of orders, at least 80 percent of his total transactions. The off-floor 
orders for which a Market-Maker receives Market-Maker treatment shall 
be subject to the obligations of Rule 8.7(a) and in general shall be 
effected for the purpose of hedging, reducing risk of, rebalancing or 
liquidating open positions of the Market-Maker. The appropriate Market 
Performance Committee may exempt one or more options classes from this 
calculation.
    .04-.13 No Change.
* * * * *
    Rule 8.14. Index Hybrid Trading System Classes: Market-Maker 
Participants
    (a) Generally: The appropriate Exchange procedures committee (i) 
may authorize for trading on the CBOE Hybrid Trading System, [or] 
Hybrid 2.0 Platform or Hybrid 3.0 Platform index options and options on 
ETFs trading on the Exchange prior to June 10, 2005 and (ii) if that 
authorization is granted, shall determine the eligible categories of 
Market-Maker participants for those options. For index options and 
options on ETFs trading for the first time on the Exchange on or 
subsequent to June 10, 2005, the Exchange shall determine the 
appropriate trading platform ( e.g., CBOE Hybrid Trading System, Hybrid 
2.0 Platform, Hybrid 3.0 Platform) and the eligible categories of 
Market-Maker participants on that platform. The Exchange shall also 
have the authority to determine whether to change the trading platform 
on which those options trade and to change the eligible categories of 
Market-Maker participants for those options. The eligible categories of 
Market-Maker participants may include:
    Designated Primary Market-Makers (``DPM''): Market-Makers as 
defined in Rule 8.80 whose activities are governed by, among other 
rules, CBOE Rules 8.80-8.91.
    Lead Market-Makers (``LMM''): Market-Makers as defined in Rule 
8.15A whose activities are governed by, among other rules, CBOE Rule 
8.15A.
    Electronic DPMs (``e-DPM''): Market-Makers as defined in Rule 8.92 
whose activities are governed by, among other rules, CBOE Rules 8.92-
8.94.
    Market-Makers (``MM''): Market-Makers as defined in Rule 8.1 whose 
activities are governed by, among other rules, CBOE Rules 8.1-8.11.
    (b) Each class designated for trading on Hybrid, [or] the Hybrid 
2.0 Platform or the Hybrid 3.0 Platform shall have an assigned DPM or 
LMM. The Exchange or the appropriate Exchange committee, as applicable 
pursuant to the authority granted under CBOE Rule 8.14(a) to determine 
eligible categories of Market-Maker participants, may determine to 
designate classes for trading on Hybrid or the Hybrid 2.0 Platform 
without a DPM or LMM provided the following conditions are satisfied:
    1.-4. No Change.
* * * * *

Rule 8.15. Lead Market-Makers and Supplemental Market-Makers in Non-
Hybrid and Hybrid 3.0 Classes

    No Change.
* * * * *

Rule 8.85. DPM Obligations

    (a) No Change.
    (b) No Change.
    (c) No Change.
    (d) No Change.
    (e) Requirement to Own Membership. Each DPM organization shall own 
one Exchange membership, and own or lease such additional Exchange 
memberships as may be necessary based on the aggregate ``appointment 
cost'' for the classes allocated to the DPM organization. Each 
membership owned or leased by the DPM organization has an appointment 
credit of 1.0. The appointment costs for the classes allocated to the 
DPM organization are:
    (i) No Change.
    (ii) No Change.
    (iii) For non-Hybrid Classes, the appointment costs as set forth 
and defined in paragraph (c)(iv) of Rule 8.3.
    For example, if the DPM organization has been allocated such number 
of option classes that its aggregate appointment cost is 1.6, the DPM 
organization would be required to own at least one Exchange membership, 
and own or lease one additional Exchange membership. The Exchange will 
rebalance the ``tiers'' set forth in Rule 8.3(c)(i), excluding the 
``AA'' and ``A+'' tiers, once each calendar quarter, which may result 
in additions or deletions to their composition. When a class changes 
``tiers'' it will be assigned the ``appointment cost'' of that tier. 
Upon rebalancing, each DPM organization will be required to own or 
lease the appropriate number of Exchange memberships reflecting the 
revised ``appointment costs'' of the classes that have been allocated 
to it. Additionally, a DPM organization is required to own or lease the 
appropriate number of Exchange memberships at the time a new option 
class allocated to it pursuant to Rule 8.95 begins trading.
    An Exchange membership shall include a transferable regular 
membership or a Chicago Board of Trade full membership that has 
effectively been exercised pursuant to Article Fifth(b) of the 
Certificate of Incorporation. The same Exchange membership(s) may not 
be used to satisfy this ownership requirement for different DPM 
organizations. In the event the member organization approved as the DPM 
organization is also approved to act as an RMM and/or e-DPM, and has 
excess membership capacity above the aggregate appointment cost for the 
classes allocated to it as the DPM, the member organization may utilize 
the excess membership capacity to quote electronically in an 
appropriate number of Hybrid 2.0 Classes in the capacity of a RMM and 
not trade in open outcry, or to quote electronically in the Hybrid 2.0 
Classes in which it is appointed an e-DPM. For example, if the DPM 
organization has been allocated such number of option classes that its 
aggregate appointment cost is 1.6, the member organization could 
request an appointment as an RMM in any combination of Hybrid 2.0 
Classes whose aggregate ``appointment cost'' does not exceed .40. The 
member organization will not function as a DPM in any of these 
additional classes. In the event the member organization utilizes any 
excess membership capacity to quote electronically in some additional 
Hybrid 2.0 Classes as an RMM or e-DPM, it must comply with the 
provisions of Rules 8.4(c) and Rule 8.93(vii), respectively.

* * * Interpretations and Policies:

    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

[[Page 24644]]

concerning the purpose of, and basis for, 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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

I. Purpose
    In 2003, CBOE introduced the Hybrid Trading System (``Hybrid'' or 
``Hybrid System''), an electronic trading platform integrated with 
CBOE's floor-based open-outcry auction market.\4\ Under CBOE's existing 
rules, the Hybrid System currently supports two trading platforms: (i) 
The original Hybrid Trading System, which is a trading platform that 
allows individual Market-Makers to submit electronic quotes in their 
appointed classes; and (ii) Hybrid 2.0, which is an enhanced trading 
platform that allows remote quoting by authorized categories of 
Exchange members. These two platforms operate on a technology system 
that is referred to as the CBOEdirect trade engine. In addition to 
these two platforms, prior to 2003 and through the present, CBOE has 
also utilized its TPF mainframe system to support trading in its ``non-
Hybrid'' classes.\5\ Therefore, options classes currently may be 
authorized by the Exchange to trade on the non-Hybrid, the Hybrid 
Trading System or Hybrid 2.0 platforms.
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    \4\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003).
    \5\ Currently, the ``non-Hybrid'' classes consist of options on 
the S&P 100 Index (OEX), options on the S&P 500 (SPX), and options 
on the Morgan Stanley Retail Index (MVR). Telephone conference 
between Greg Hoogasian, Assistant Secretary, CBOE, and Geoffrey 
Pemble, Special Counsel, Division of Market Regulation, Commission, 
on April 23, 2007.
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    CBOE has determined to migrate the trading programs operating on 
its TPF mainframe system over to the CBOEdirect trade engine. To 
accommodate this changeover, this filing proposes to amend CBOE's 
Hybrid rules to introduce a third trading platform into its existing 
CBOEdirect system, called ``Hybrid 3.0.'' Hybrid 3.0 will incorporate 
certain aspects of both the Hybrid Trading System and non-Hybrid 
platforms. Current CBOE hybrid rules will apply to the proposed Hybrid 
3.0 except for a few distinctions noted below. This in turn will allow 
CBOE to provide a more streamlined, simplified and enhanced trading 
functionality for all options products trading on CBOE.
    Hybrid 3.0 will consist of a single set of automatically updated 
market quotations that represents the entire group of Market-Markers in 
the trading crowd that are assigned to an option class.\6\ Consistent 
with this philosophy, Hybrid 3.0 will allow a single electronic quote 
to be submitted in each option series (collectively ``Hybrid 3.0 crowd 
quote'').\7\ The single quote in each option series will be generated 
from either an appointed Designated Primary Market Maker (``DPM'') or 
Lead Market Maker (``LMM''). Thus, as with the existing non-Hybrid 
platform where there may be an appointed DPM or LMM that generates an 
automated quote for the trading crowd,\8\ in the proposed Hybrid 3.0 
platform, the quote that the DPM or LMM electronically disseminates in 
each option series will be the quote that represents the trading crowd 
that is assigned to that option series' class.
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    \6\ By comparison, this is similar to CBOE's existing non-Hybrid 
platform.
    \7\ See proposed changes to CBOE Rule 1.1(aaa).
    \8\ Currently, the non-Hybrid platform allows for the use of an 
Exchange-sponsored autoquote system. However, this functionality 
will not be available for Hybrid 3.0.
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    In Hybrid 3.0, members of the trading crowd will be able to affect 
changes to the Hybrid 3.0 crowd quote through the submission of manual 
quotes. The manual quotes disseminated in Hybrid 3.0 Classes will be 
separate and additional to the Hybrid 3.0 crowd quote. Similar to 
automatic quotes and manual quotes in existing CBOE non-Hybrid classes, 
in Hybrid 3.0 Classes, members of the trading crowd may verbalize 
manual quotes to be input into Exchange systems by quote reporters for 
dissemination to the Options Price Reporting Authority (``OPRA'').\9\ 
In addition, this filing proposes that for Hybrid 3.0 classes, if 
market participants as defined in Rule 6.45B are eligible to submit 
orders for entry into the electronic book pursuant to proposed CBOE 
Rule 7.4(a)(1)(i), then the appropriate Procedure Committee may 
determine to disable manual quotes.\10\ Whether orders are entered into 
the electronic book or whether manual quoting is allowed, access to 
Hybrid 3.0 classes will be maintained at all times.
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    \9\ Similar to the existing functionality for manual quotes in 
non-Hybrid classes, in Hybrid 3.0 the Exchange's disseminated OPRA 
quote will not distinguish between electronic and manual quotes but 
members of the trading crowd will be able to distinguish between 
electronic and manual quotes.
    \10\ See proposed changes to CBOE Rule 6.43(b).
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    CBOE Rule 7.4, which pertains to the obligations of orders, will be 
applied to Hybrid 3.0 similar to the way it applies to CBOE's existing 
Hybrid Trading System, with one distinction as noted below.\11\ 
Consistent with current practices as applied to Hybrid, Hybrid 3.0 will 
allow customer orders to rest in the electronic book.\12\ In addition, 
this filing proposes to permit Hybrid 3.0 to be configured to allow 
other origin order types into the electronic book with certain 
committee approval. Specifically, CBOE Rule 7.4 would allow the 
appropriate Procedure Committee to determine, on a class by class 
basis, to allow certain types of orders (other than customer orders) 
into the electronic book.\13\ This filing proposes to allow the 
appropriate Procedure Committee to make such a determination in Hybrid 
3.0, with one distinction, in that the appropriate Procedure Committee, 
on a class by class basis, may allow market participants as defined in 
Rule 6.45B to be eligible to submit orders for entry into the 
electronic book.\14\ This is consistent with current practices in 
CBOE's non-Hybrid Classes.\15\
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    \11\ See proposed changes to CBOE Rule 7.4.
    \12\ See CBOE Rule 7.4(a)(1).
    \13\ Id.
    \14\ Currently, for Hybrid and Hybrid 2.0 classes, CBOE Rule 
7.4(a)(1) permits market participants as defined in Rule 6.45A or 
6.45B to be eligible to submit orders for entry into the electronic 
book without the appropriate Procedure Committee's approval.
    \15\ See CBOE Rule 6.8.01.
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    On the proposed Hybrid 3.0 platform, automatic execution against 
quotes will not be allowed.\16\ However, if the electronic book price 
matches a manual quote, then automatic execution will be permissible 
against public customer orders in the electronic book (for example, if 
the electronic book is a $1.20 bid and the manual quote is at a $1.20 
bid, then the system will allow for automatic execution against the 
$1.20 electronic book bid but not the $1.20 quote).\17\
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    \16\ See CBOE Rule 6.13.
    \17\ See proposed changes to CBOE Rule 6.43(b).
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    For Hybrid 3.0 Classes, all eligible orders will receive automatic 
execution against public customer orders in the electronic book. The 
remaining balance of the eligible order, if any, may be (i) represented 
in the electronic book provided such order is eligible for book entry 
pursuant to Rule 7.4 or (ii) if the order is not eligible for book 
entry, it will route to PAR, BART, or to the order entry firm's booth 
printer.\18\ Even if an order is eligible for book entry, the order 
entry firm would have the discretion to

[[Page 24645]]

have the remaining balance of the eligible order route to PAR, BART, or 
to the order entry firm's booth printer. Consistent with existing 
practices in CBOE's non-Hybrid Classes, CBOE will apply similar firm 
quote surveillance procedures in Hybrid 3.0.
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    \18\ By comparison, in CBOE's non-Hybrid Classes, orders may be 
eligible for automatic execution on the Exchange's Retail Automatic 
Execution System (``RAES'') (See CBOE Rules 6.8 and 24.17). However, 
the number of trades that occur on RAES is minimal (approximately 
\1/10\th of 1% of all volume occurs on RAES).
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    Hybrid 3.0 proposes to permit automatic execution by non-broker-
dealer public customers, and, as determined by the appropriate 
Procedure Committee, on a class-by-class basis, broker-dealers that are 
not Market-Makers or Specialists on an exchange who are exempt from the 
provisions of Regulation T of the Federal Reserve Board pursuant to 
Section 7(c)(2) of the Act (``non-Market-Maker or non-Specialists 
broker-dealers'') may be eligible for automatic execution.\19\
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    \19\ See proposed changes to CBOE Rule 6.13(b)(i)(C)(i). By 
comparison, this is consistent with the appropriate Procedure 
Committee's determination to permit broker-dealer orders to be 
automatically executed through RAES in CBOE's non-Hybrid Classes 
(See CBOE Rule 6.8.01).
---------------------------------------------------------------------------

    CBOE Rule 6.45B, which relates to the priority and allocation of 
trades, will also be applied to Hybrid 3.0 similar to the way it is 
applied to CBOE's existing Hybrid Trading System as described in 
various examples below.
    In Hybrid 3.0, eligible public customer orders in the electronic 
book may have priority to trade against marketable orders in Hybrid 3.0 
classes and multiple customer orders in the electronic book at the same 
price will be ranked based on time priority pursuant to the priority 
methods set forth in Rule 6.45B.\20\
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    \20\ See CBOE Rule 6.45B(a)(ii)(A)(1).
---------------------------------------------------------------------------

    Unlike CBOE's non-Hybrid classes, Hybrid 3.0 proposes to allow the 
interaction of certain market participants' quotes and orders with the 
electronic book. Specifically, Hybrid 3.0 proposes to allow (i) Each 
Market-Maker in the trading crowd and (ii) all floor brokers in the 
trading crowd (collectively referred to as ``in-crowd market 
participants'' or ``ICMPs'') to trade against the electronic book 
pursuant to CBOE Rule 6.45B(c). As with CBOE's existing Hybrid 
platforms and pursuant to CBOE Rule 6.45B(c), if only one ICMP submits 
an electronic order or quote to trade with an order in the electronic 
book on the proposed Hybrid 3.0, then that ICMP will automatically 
execute against the order in the electronic book and shall be entitled 
to receive an allocation of the order in the electronic book up to the 
size of the market participant's order or quote. For instances when 
there is more than one ICMP, Hybrid 3.0 proposes to allow the use of a 
quote trigger (joining period) which may be set by the appropriate 
Procedure Committee, on a class by class basis, pursuant to CBOE Rule 
6.45B(c). Under the quote trigger process, the first ICMP to interact 
with the electronic book order starts a counting period lasting N-
seconds whereby each ICMP that submits an order within that ``N-second 
period'' becomes part of the ``N-second group'' and is entitled to 
share in the allocation of that order via the formula contained in CBOE 
Rule 6.45B(c).
    CBOE Rule 6.45B(d) currently governs the interaction of quotes when 
they are locked (e.g., $1.00 bid-1.00 offer). Specifically, CBOE Rule 
6.45B(d) provides that when the quotes of two Market-Makers interact 
(i.e., ``quote lock''), either party has one second during which it may 
move its quote without obligation to trade with the other party. If, 
however, the quotes remain locked at the conclusion of one-second, the 
quotes trade in full against each other. For quote locks in Hybrid 3.0 
classes, this filing proposes the length of the counting period to be 
set by the appropriate Procedure Committee pursuant to CBOE Rule 
6.45B(d) provided that the period shall not exceed ten seconds.\21\ The 
proposed ten second threshold is intended to provide additional 
flexibility for Market-Makers to become acclimated with Hybrid 3.0.\22\
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    \21\ See proposed changes to CBOE Rule 6.45B(d).
    \22\ By comparison, the current quote lock timer for Hybrid and 
Hybrid 2.0 classes may not exceed one second. (See CBOE Rule 
6.45B(d)(i)(C)).
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    Regarding the time periods pertaining to order exposure in 
``Principal Transactions'' in Interpretation .01 of Rule 6.45B and 
``Solicitation Orders'' in Interpretation .02 of Rule 6.45B, this 
filing proposes a minimum exposure time for Hybrid 3.0 classes, on a 
class-by-class basis, to be at least three seconds but shall not exceed 
thirty seconds.\23\ Again, this extended time frame for exposure will 
provide additional flexibility as ICMPs become more acclimated with 
Hybrid 3.0.\24\
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    \23\ See proposed changes to CBOE Rule 6.45B.01 and 6.45B.02.
    \24\ By comparison, the current exposure period for Hybrid and 
Hybrid 2.0 classes is at least three seconds. (See CBOE Rule 
6.45B.01 and 6.45B.02).
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    Since Hybrid 3.0 proposes a single quoter environment, only the DPM 
or LMM responsible for generating the trading crowd's quote will be 
required to enter quotes as part of the opening rotations \25\ in 
Hybrid 3.0 option classes. The DPM or LMM must enter opening quotes in 
opening rotations that comply with the legal quote width requirements 
of Rule 8.7(b)(iv), and if there is not a quote present in a series 
that complies with the legal quote width requirements of Rule 
8.7(b)(iv), then that series will not open.\26\ Additionally, Hybrid 
3.0 will allow public customer, broker-dealer, Exchange Market-Maker, 
away Marker-Maker and Specialist participation in the opening. Since 
Hybrid 3.0 is a single quoter environment, these participants will not 
be permitted to enter opening quotes in opening rotations but will be 
permitted to directly enter opening orders in opening rotations in 
Hybrid 3.0 classes.\27\
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    \25\ Opening rotations include all openings and re-openings in 
Hybrid 3.0 option classes.
    \26\ By comparison, this is consistent with the opening quote 
requirements in CBOE's existing Hybrid classes that utilize CBOE's 
Hybrid Opening System (``HOSS'') (See CBOE Rule 6.2B).
    \27\ See proposed Interpretation .01 to CBOE Rule 6.2B. By 
comparison, in non-Hybrid option classes (such as options on the S&P 
500 (``SPX'') and options on the S&P 100 (``OEX'')), Market-Makers 
and broker-dealers are not able to directly participate in the 
opening series that utilize ROS. For example, Market-Makers who wish 
to participate on ROS in the opening series in non-Hybrid option 
classes may submit orders through the LMM at least ten minutes prior 
to the opening of trading pursuant to CBOE Rules 6.2A and 24.13.
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    Similar to CBOE's non-Hybrid classes, Hybrid 3.0 also proposes to 
allow special ``modified'' opening procedures for settlement in options 
on the Volatility Indexes.\28\ Similar to what is utilized today in 
CBOE's non-Hybrid classes, the proposed Modified HOSS Opening 
Procedures in Hybrid 3.0 will provide a more accurate determination of 
these settlement values and will assure that these values more closely 
converge with the prices of the index options from which they are 
derived just as they do for settlement in the Volatility Indexes. This 
in turn will continue to make it easier for all market participants to 
participate fully in the establishment of the settlement values of 
Volatility Indexes in an efficient and automated manner.
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    \28\ See the ``Modified HOSS Opening Procedures'' in proposed 
Interpretation .01 to CBOE Rule 6.2B. By comparison, non-Hybrid 
option classes that utilize RAES and ROS have special procedures for 
purposes of settlement in the volatility indexes called ``Modified 
ROS Opening Procedures'' pursuant to Interpretation .03 to CBOE Rule 
6.2A.
---------------------------------------------------------------------------

    Consistent with CBOE's current Hybrid platforms, this filing also 
proposes to allow the appropriate Exchange committee to determine 
whether complex orders entered in Hybrid 3.0 option classes are 
eligible for entry into CBOE's Complex Order Book.\29\
---------------------------------------------------------------------------

    \29\ See CBOE Rule 6.53C.
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    Overall, this filing proposes to incorporate Hybrid 3.0 into CBOE's 
existing Hybrid rules, since Hybrid 3.0 is being introduced as an 
additional platform to CBOE's current Hybrid Trading System. By 
establishing Hybrid

[[Page 24646]]

3.0, CBOE will then be able to migrate all of its trading platforms to 
the more advanced CBOE direct technology platform. For these reasons, 
we are proposing to define all references to ``Hybrid,'' ``Hybrid 
System,'' and ``Hybrid Trading System'' in CBOE's rules to mean all 
CBOE hybrid platforms, including Hybrid 3.0, unless otherwise provided 
by a specific CBOE rule.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Securities Exchange Act of 1934 (the ``Act'') \30\ 
in general and furthers the objectives of Section 6(b)(5) of the Act 
\31\ in particular in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public interest.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2006-101 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 Number SR-CBOE-2006-101. 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 such 
filing also will be available for inspection and copying at the 
principal offices 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 Number SR-CBOE-2006-101 and should be submitted on or before May 
24, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-8395 Filed 5-2-07; 8:45 am]

BILLING CODE 8010-01-P
