

[Federal Register: September 27, 2007 (Volume 72, Number 187)]
[Notices]
[Page 54956-54957]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27se07-103]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56487; File No. SR-CBOE-2007-04]


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

September 20, 2007.

I. Introduction

    On February 21, 2007, 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 6.25,
Nullification and Adjustment of Equity Options Transactions, to revise
its obvious error provision related to ``no bid series'' and to make a
non-substantive change by adding a cross-reference within the text of
Rule 6.25. On July 2, 2007, 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 August 9, 2007.\3\ The
Commission received no comment letters on the proposal. This order
approves the proposed rule change as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 56190 (August 2, 2007),
72 FR 44892.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.25 by modifying the
nullification provisions for ``no bid series'' options.\4\ Currently,
Rule 6.25 provides that electronic transactions in series that are
quoted no bid are subject to nullification if at least one strike price
below (for calls) or above (for puts) in the same options class was
quoted no bid at the time of execution. Under the proposed revision to
Rule 6.25, electronic transactions in a series quoted no bid on the
Exchange could be nullified if: (i) The bid in that series immediately
preceding the execution was, and for five (5) seconds prior to the

[[Page 54957]]

execution remained, zero; and (ii) at least one strike price below (for
calls) or above (for puts) in the same options class was quoted no bid
at the time of execution.
---------------------------------------------------------------------------

    \4\ The proposed rule change also would add a cross-reference to
paragraph (a)(5) to the introductory language of Rule 6.25.
According to the CBOE, this proposed change is non-substantive
because the text of Rule 6.25(a)(5) currently provides that the
provision is not applicable to trades executed in open outcry.
---------------------------------------------------------------------------

    The proposed rule change would require that for purposes of the
``no bid series'' provision, bids and offers of the parties to the
subject trade that are in any of the series in the same options class
would not be considered. In addition, the proposed rule change would
provide that each group of series in an options class with a non-
standard deliverable would be treated as a separate options class.
Finally, the proposed rule change would clarify that the ``no bid
series'' provision is intended to apply to series quoted no bid on the
Exchange (as opposed to series for which the national best bid is
quoted no bid).\5\
---------------------------------------------------------------------------

    \5\ Consistent with the existing provisions, for a nullification
to be granted, any member or person associated with a member that
believes it participated in a transaction that falls within the ``no
bid series'' parameters must also satisfy the notification
procedures set forth in paragraph (b) of Rule 6.25.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Exchange represented that the proposed changes to the ``no bid
series'' provision are intended to address the Exchange's experience in
applying this provision to particular trading scenarios that have
occurred. The Commission believes that the proposed rule change is
designed to clarify the application of Rule 6.25 to ``no bid series''
options and thus is an appropriate modification of the Exchange's
obvious error rule.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change(SR-CBOE-2007-04), as amended, is
hereby approved.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-19080 Filed 9-26-07; 8:45 am]

BILLING CODE 8010-01-P
