

[Federal Register: October 25, 2007 (Volume 72, Number 206)]
[Notices]               
[Page 60697-60699]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25oc07-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56680; File No. SR-CBOE-2007-59]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend the 
Minimum Quote Size Requirements for Hybrid Opening System Rotations

October 19, 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 September 17, 2007, 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 Commission is publishing this notice to 
solicit comments on the proposed rule change 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 its minimum quote size requirements 
that are applicable to trading rotations conducted via the Hybrid 
Opening System (``HOSS''). The text of the proposed rule change is 
available at the Exchange, on the Exchange's Web site (http://www.cboe.org/Legal
), 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 60698]]

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

1. Purpose
    The Exchange proposes to amend CBOE Rule 6.2B, Hybrid Opening 
System (``HOSS''), which pertains to trading rotations for series 
trading on the CBOE Hybrid Trading System (``Hybrid''), in order to 
modify the minimum quote size requirements applicable to Market-Makers, 
Remote Market-Makers, Designated Primary Market-Makers, Electronic 
Designated Primary Market-Makers and Lead Market-Makers (collectively 
referred to as ``Market-Makers'').\3\
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    \3\ Currently, Designated Primary Market-Makers, Electronic 
Designated Primary Market-Makers and Lead Market-Makers are required 
to enter opening quotes in accordance with CBOE Rule 6.2B in 100% of 
the series of each appointed class; whereas, other Market-Makers and 
Remote Market-Makers are permitted, but not required, to enter 
opening quotes in accordance with CBOE Rule 6.2B. See CBOE Rules 
6.2B, 8.15A (``Lead Market-Makers in Hybrid Classes'') (subparagraph 
(b)(iv) of this rule has been interpreted by the Exchange to require 
an LMM to enter opening quotes in 100% of the series of each 
appointed class), 8.85 (``DPM Obligations''), and 8.93 (``e-DPM 
Obligations''). The Exchange notes, however, that it has submitted a 
separate proposed rule change that would modify the opening quote 
obligations of Designated Primary Market-Makers, Electronic Primary 
Market-Makers, and Lead Market-Makers. See SR-CBOE-2007-87.
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    With respect to Market-Makers' quote sizes generally, CBOE Rule 8.7 
(``Obligations of Market-Makers'') currently provides that the initial 
size a Market-Maker electronically quotes must be at least ten 
contracts (undecremented size) (the ``10-up'' requirement); however, if 
the underlying primary market disseminates a 100-share best bid or 
offer quote (which is the equivalent of one option contract), a Market-
Maker's undecremented quote may be for as low as one contract (``1-
up'').\4\ The proposed revisions to CBOE Rule 6.2B would revise these 
parameters only with respect to opening rotations in Hybrid classes. In 
particular, the existing minimum quote size requirements would continue 
to apply, except that a Market-Maker would be permitted to enter an 
opening quote for as low as one contract if the underlying primary 
market disseminates less than a 1000-share best bid or offer quote 
(which is the equivalent of ten contracts) immediately prior to an 
option series opening.\5\
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    \4\ See, e.g., CBOE Rule 8.7(d)(ii)(B).
    \5\ Under CBOE Rule 6.2B, the HOSS rotation process for an 
option class is initiated when the underlying market opens. When the 
underlying market ``opens'' is determined, on a class-by-class 
basis, to be either the opening trade and/or opening quote (or 
whichever occurs first). In addition, the Commission notes that CBOE 
recently modified the parameters for determining when the underlying 
market opens. See Securities Exchange Act Release No. 56600 (October 
2, 2007), 72 FR 57619 (October 10, 2007) (SR-CBOE-2007-88). Once the 
underlying market open occurs, HOSS initiates the overlying option 
class opening and sends a Rotation Notice to market participants. 
Thereafter, HOSS will open the series of a class in a random order. 
The Exchange notes that the underlying primary market's last 
reported quotation information may change between the time that the 
underlying market opens and the time that an overlying option series 
opens. For purposes of the proposed ``1-up'' quoting relief, the 
Exchange proposes that a Market-Maker only look to the underlying 
primary market's last reported quotation information that exists 
immediately prior to time the Market-Maker enters its opening 
quotes. Thus, for example, if an underlying primary market has 
``opened'' with a best bid of 1000 shares and best offer of 1000 
shares and, subsequent to that time but immediately prior to the 
time the Market-Maker enters its opening quotes, the underlying 
primary market's last reported best bid was 500 shares and best 
offer was 500 shares (i.e., 500 x 500), a Market-Maker would be 
permitted to enter a minimum opening quote for one contract on both 
the bid and offer sides of a call or put series (i.e., 1 x 1). If, 
however, the underlying primary market's best bid was 500 shares and 
best offer was 1000 shares immediately prior to the time the Market-
Maker enters its opening quotes (i.e., 500 x 1000), to the extent 
required to quote, a Market-Maker would be permitted to enter a 
minimum opening quote for one contract on the bid side and required 
to enter a minimum opening quote for ten contracts on the offer side 
for a call series (i.e., 1 x 10). Similarly, to the extent required 
to quote, a Market-Maker would be required to enter a minimum 
opening quote for ten contracts on the bid side and permitted to 
enter a minimum opening quote for one contract on the offer side for 
a put series (i.e., 10 x 1). This ability to enter an opening quote 
for as low as one contract under CBOE Rule 6.2B would take 
precedence over any other Exchange rules regarding initial size. See 
proposed CBOE Rule 6.2B.02. In this regard, the Exchange notes that, 
as compared to the intra-day quoting requirements in CBOE Rule 8.7, 
there would be no requirement that the opening quote process be 
automated and the Market-Maker's quote size automatically return to 
at least 10-up when the underlying primary market no longer 
disseminates less than a 1000-share quote. Instead, once a 1-up 
opening quote is entered by a Market-Maker, the Market-Maker may 
maintain the quote until it is decremented or the Market-Maker 
determines to update it. Once an option series is opened and a 
Market-Maker's quote is decremented or the Market-Maker determines 
to update the quote, such updated quote would be subject to the 
electronic quotation size obligations set forth in CBOE Rule 8.7, 
which as discussed above requires that the initial size a Market-
Maker electronically quotes must be at least ten contracts 
(undecremented size). For intra-day quoting, CBOE Rule 8.7 also 
provides that, if the underlying primary market disseminates a 100-
share quote, a Market-Maker's undecremented quote may be for as low 
as one contract, provided the process is automated and the quote 
automatically returns to at least 10-up when the underlying primary 
market no longer disseminates a 100-share quote. See supra, note 4.
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    Generally, the Exchange believes that the existing quote size 
requirement imposes a reasonable obligation on Market-Makers, who, in 
turn for satisfying this and other obligations, are entitled to receive 
market maker margin treatment. Nevertheless, the Exchange believes that 
there are instances where requiring Market-Makers to quote 10-up during 
an opening rotations imposes a heightened and inappropriate level of 
risk upon them. Accordingly, in the Exchange's view, the purpose of 
this filing is to adopt a limited exception to the 10-up minimum 
quoting requirement to provide relief in one such specific instance.
    The Exchange believes that, when the underlying primary market 
disseminates less than a 1000-share quote, it substantially restricts 
the amount of liquidity available in that security on that particular 
side of the market. The Exchange notes that options exchanges are 
derivative markets. In this regard, the Exchange believes that, with a 
minimum quote size requirement of ten contracts over multiple series, 
an options exchange provides exponentially more liquidity than is 
available in an underlying primary stock market that is disseminating 
less than a 1000-share quote.\6\ Additionally, according to the 
Exchange, Market-Makers must hedge their transactions by buying and/or 
selling stock, and when the underlying primary stock exchange posts 
less than a 1000-share quote during the opening, it restricts the 
Market-Maker's ability to hedge, which does nothing but increase the 
Market-Maker's financial exposure and risk. This exposure and risk is 
intensified during the opening, which tends to be one of the busiest 
periods of the trading day. For these reasons, the Exchange believes 
that Market-Makers in this instance should have the ability to lower 
their Hybrid opening quote sizes to as low as one contract if they 
choose, thereby being more consistent with the amount of liquidity 
provided by the underlying primary market.\7\
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    \6\ According to the Exchange, an options exchange may list 20 
or more options series for an underlying stock. Thus, for example, 
if just a single Market-Maker posts 10-up markets in twenty series, 
that Market-Maker alone would be providing liquidity equivalent to 
20,000 shares, which would dwarf the underlying primary market's 
size commitment of less than 1000 shares.
    \7\ The Exchange also believes that nothing in this proposal 
would affect a Market-Maker's obligation to honor its firm quote 
requirements imposed by CBOE Rule 8.51 (``Firm Disseminated Market 
Quotes''). Accordingly, for example, if a Market-Maker disseminates 
a one contract market, its firm quote obligation would be one 
contract.
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    The Exchange states that it is also cognizant of the desire to 
continue to maintain fair and orderly openings. CBOE does not think 
that this proposal would detract from that objective because, 
irrespective of the size associated with a Market-Maker's quotes, the 
options class would continue to open in the same automated fashion and, 
to the extent there may be

[[Page 60699]]

any market order imbalance on the opening, such imbalances would 
continue to be addressed in the same manner.\8\
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    \8\ HOSS will not open an option series if the opening trade 
would leave a market order imbalance (i.e., there are more market 
orders to buy or to sell for the particular series than can be 
satisfied by the limit orders, quotes and market orders on the 
opposite side). If this condition occurs, a notification will be 
sent to market participants indicating the size and direction (buy 
or sell) of the market order imbalance. HOSS will not open the 
series until the market order imbalance is satisfied and will repeat 
this process until the series is open. See CBOE Rule 6.2B(e)(iii) 
and (f). Upon receipt of these messages, generally the Designated 
Primary Market-Maker and Electronic Designated Primary Market-
Maker(s) or Lead Market-Maker, as applicable, other Market-Makers 
with an appointment in the class, and/or other market participants, 
would take steps to address and resolve the market order imbalance 
(which steps may include, for example, a Market-Maker adding more 
size to his quotes). See also CBOE Rule 8.7(b) (which provides, 
among other things, that 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 temporary disparity 
between the supply of and demand for a particular option contract) 
and CBOE Rule 7.5 (``Obligation for Fair and Orderly Market'') 
(which provides, among other things, that Market-Makers with an 
appointment in a class that are present on the floor of the Exchange 
may be called upon to make bids and/or offers that contribute to 
meeting the standards set forth in CBOE Rule 8.7).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act,\9\ in general, and furthers the objectives of 
section 6(b)(5) of the Act,\10\ in particular, in that it is designed 
to facilitate transactions in securities, to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and, 
in general, to protect investors and the public interest. The Exchange 
believes that the proposal provides for a very limited exception to the 
general requirement that Market-Maker's quotes be for a minimum ten 
contracts. The Exchange believes that this exception, which in the 
Exchange's view is narrowly-tailored, will provide a measure of 
protection to Market-Makers when the underlying primary market 
disseminates less than a 1000-share quote during the opening. 
Accordingly, the Exchange believes the proposal serves to enhance the 
incentives of Market-Makers to quote competitively during Hybrid 
opening rotations and reduces the disincentives to quote competitively.
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    \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

    The Exchange 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:

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-2007-59 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-2007-59. 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 on official business 
days between the hours of 10 a.m. and 3 p.m. 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 Number SR-
CBOE-2007-59 and should be submitted on or before November 15, 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. E7-21028 Filed 10-24-07; 8:45 am]

BILLING CODE 8011-01-P
