

[Federal Register: August 20, 2007 (Volume 72, Number 160)]
[Notices]               
[Page 46525-46527]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20au07-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56245; File No. SR-CBOE-2006-104]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment 
No. 1 Thereto To Codify the Hybrid Price Check Parameter

August 14, 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 December 7, 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. On August 1, 2007, the Exchange filed 
Amendment No. 1 to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 Rule 6.13, CBOE Hybrid System's 
Automatic Execution Feature, in order to codify an automated system 
feature that prevents executions at potentially erroneous prices.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.cboe.com), at the Exchange's principal office, 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.

[[Page 46526]]

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

1. Purpose
    Orders that are eligible for automatic execution through the CBOE 
Hybrid Trading System (``Hybrid'') may be automatically executed in 
accordance with the provisions of CBOE Rule 6.13. Orders that are not 
eligible for automatic execution route on a class by class basis to PAR 
(the public automated routing system) or BART (the booth automated 
routing terminal) or, at the order entry firm's discretion, to the 
order entry firm's booth printer.
    The purpose of the proposed rule change is to amend CBOE Rule 6.13 
to codify a description of the Exchange's price check parameter 
functionality, which is a functionality that could be activated in 
certain series of a given options class that would prevent an automatic 
execution of a market order from occurring outside a prescribed market 
width. The Exchange represents that the price check parameter is 
designed to help maintain a fair and orderly market. Specifically, the 
functionality would not automatically execute eligible orders that are 
market orders if the width between the Exchange's best bid and best 
offer is not within an acceptable price range. The applicable price 
ranges will be determined by the appropriate Exchange Procedure 
Committee on a series by series basis and will be announced to the 
membership via Regulatory Circular generally at least one day in 
advance.
    For purposes of this provision, an ``acceptable price range'' shall 
be no less than 1.5 times the corresponding bid/ask differentials in 
CBOE Rule 8.7(b)(iv)(A).\3\ In addition, the Exchange is proposing that 
the senior official in CBOE's Control Room or two Floor Officials may 
grant intra-day relief by widening the acceptable price range for one 
or more option series. If intra-day relief is granted, it will be 
announced via verbal message to the trading crowd, printer message to 
member organizations on the trading floor, and electronic message to 
members that request to receive such messages. The granting of this 
intra-day relief will be for no more than the duration of the 
particular trading day. Any decision to extend relief beyond an intra-
day basis would be announced to the membership via Regulatory Circular. 
Market orders that trigger the applicable price check parameter and, 
thus, that are not eligible for automatic execution, will be routed on 
a class by class basis to PAR or BART or, at the order entry firm's 
discretion, to the order entry firm's booth printer.
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    \3\ CBOE Rule 8.7(b)(iv)(A) sets forth the bid/ask differentials 
for open outcry trading, which are as follows: No more than $0.25 
between the bid and offer for each option contract for which the bid 
is less than $2, no more than $0.40 where the bid is at least $2 but 
does not exceed $5, no more than $0.50 where the bid is more than $5 
but does not exceed $10, no more than $0.80 where the bid is more 
than $10 but does not exceed $20, and no more than $1.00 where the 
bid is more than $20.
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    For example, the Exchange may determine to set a price check 
parameter that provides that market orders would not automatically 
execute if the width between the Exchange's best bid and best offer is 
$0.40 or more in a series where the bid is less than $2 ($0.40 is more 
than 1.5 x the standard bid/ask differential of $0.25). Assume that the 
market in the series is $1.65-$1.85; the bid is for 10 contracts, the 
next best bid is $1.50 for 10 contracts, and the next best bid is $0.50 
for 10 contracts. An incoming sell order for 50 contracts would trade 
against the $1.65 for 10 contracts and the $1.50 for 10 contracts.\4\ 
When the bid moves to $0.50, the price check parameter would be 
triggered because the width between the best bid ($0.50) and best offer 
($1.85) is wider than the acceptable $0.40 price range. As a result, 
the remaining 30 contracts would route to PAR, BART, or the booth.\5\
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    \4\ This example assumes that CBOE is at the national best bid 
or offer (``NBBO'') at each price point. If CBOE is not at the NBBO, 
the order would not be automatically executed at prices inferior to 
the NBBO and instead would route to PAR, BART, or the Hybrid Agency 
Liaison (``HAL''), which is a feature within Hybrid that provides 
automated handling in designated Hybrid option classes for 
qualifying electronic orders that are not automatically executed. 
See CBOE Rules 6.13(b)(iv) and 6.14.
    \5\ Following from the example above, on an intra-day basis the 
senior official or two Floor Officials may determine based on market 
conditions to grant relief by widening the acceptable price range 
from $0.40 (e.g., the range might be temporarily widened so that 
automatic executions would not occur if the width between the best 
bid and best offer is $0.80 or more).
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    The Exchange believes that the proposed rule change is consistent 
with the firm quote requirements of CBOE's Rule 8.51, Firm Disseminated 
Market Quotes, and the Commission's Rule 602 under Regulation NMS.\6\ 
In that regard, the Exchange notes that the Quote Rule does not require 
an automatic execution.\7\ The Exchange also notes that it would not be 
disengaging its auto-ex system by this proposed rule change, but merely 
amending the rule to provide for certain circumstances in which market 
orders may not receive an automatic execution.
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    \6\ 17 CFR 242.602.
    \7\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05) (order approving 
Hybrid, including Hybrid's automatic execution feature).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \8\ and the rules and regulations under the Act applicable to 
national securities exchanges and, in particular, the requirements of 
section 6(b) of the Act.\9\ Specifically, the Exchange believes the 
proposed rule change is consistent with section 6(b)(5) of the Act,\10\ 
which requires that the rules of an exchange be designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts, to remove impediments to and to perfect the 
mechanism for a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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

    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 such 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 46527]]

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 No. SR-CBOE-2006-104 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-104. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of CBOE. 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-2006-104 and should be 
submitted on or before September 10, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-16331 Filed 8-17-07; 8:45 am]

BILLING CODE 8010-01-P
