

[Federal Register: October 31, 2007 (Volume 72, Number 210)]
[Notices]               
[Page 61694-61696]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc07-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56701; File No. SR-CBOE-2007-68]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment No. 1, Regarding Complex Orders

October 25, 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 June 20, 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 prepared 
substantially by the CBOE. On October 19, 2007, the CBOE filed 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendment No. 1, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the original filing in its 
entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its rules regarding the handling of 
certain complex orders. The text of the proposed rule change is 

[[Page 61695]]

http://www.cboe.org/Legal), at the CBOE's Office of the Secretary, 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.

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

1. Purpose
    CBOE Rule 6.53C, ``Complex Orders on the Hybrid System,'' governs 
the electronic handling and execution of complex orders by the 
Exchange's Hybrid System. The purpose of this filing is to allow for 
the electronic handling and execution of stock-option orders on the 
Exchange. These are a type of complex order that consist of an option 
component and a stock component. Stock-option orders are popular with 
investors (e.g., buy-writes) and are frequently handled on CBOE. To 
date, these orders are handled manually and the option component is 
traded in open outcry by a broker. With the establishment of the CBOE 
Stock Exchange (``CBSX''), an electronic stock trading facility of 
CBOE, the Exchange is now positioned to handle and trade stock-option 
orders electronically, with the stock component execution taking place 
on CBSX.
    The Exchange proposes to handle these orders in a manner that is 
substantially similar to other complex orders handled pursuant to CBOE 
Rule 6.53C. Electronic stock-option orders will be accepted by the 
Hybrid System and auctioned in the Complex Order Auction (``COA'') 
pursuant to CBOE Rule 6.53C(d) when the requirements for an auction are 
met. An unexecuted stock-option order can also be maintained by the 
system (either in the Complex Order Book (``COB'') or on the PAR 
workstation), either of which will monitor the marketability of the 
order, taking into account the CBSX market for the execution of the 
stock component of the order.
    There are four differences between the handling of stock-option 
orders and other complex order types handled pursuant to CBOE Rule 
6.53C. First, as previously mentioned, the stock portion of the stock-
option order will be executed on CBSX. All such executions will be 
consistent with CBSX trading rules, including priority and matching 
rules. The execution of the stock-option order cannot take place until 
the desired price of the stock component is achievable on CBSX. The 
option leg of the stock-option order will not trade ahead of any 
resting public customer orders on the Hybrid book. This is consistent 
with existing CBOE Rule 6.45A(b)(ii), which provides that stock-option 
orders do not have priority over bids/offers in the public customer 
limit order book. The option leg may be executed in one-cent increments 
regardless of the minimum increment applicable to the series.
    For example: a customer enters a buy-write order to buy 100 shares 
of XYZ (trading around $40) and sell a 45 call with a net price of 
$39.00. There is a public customer order in the Hybrid book to sell the 
45 call for $1. When executing the buy-write against auction responses, 
the system will not allow the option leg of the transaction to trade at 
$1 or higher (thereby preserving the resting limit order's priority at 
that price). An execution could occur where the option leg prints at 
$0.99 and the stock trade prints at $39.99 (in accordance with CBSX 
priority rules). This meets the buy-write's limit price (involving a 
total cost of $3900) and does not violate priority on CBOE or CBSX.
    Second, the execution of a stock-option order submitted to the COB 
is slightly different than the priority outlined in CBOE Rule 
6.53C(c)(ii). More specifically, a stock-option order submitted to the 
CBOE will trade in the following sequence: (1) Against other stock-
option orders in the COB using public customer priority and then time 
priority (thus, if there are multiple public customer and broker-dealer 
stock-option orders resting in COB, the public customer orders will 
trade first with time priority among them, and then the broker-dealer 
orders will trade with time priority among them); (2) against 
individual orders or quotes on the Exchange (i.e., the CBSX book and 
the options Hybrid book), provided the stock-option order can be 
executed in full (or in a permissible ratio); and (3) against orders or 
quotes submitted by Market Participants, as set forth in CBOE Rule 
6.53C(c)(ii)(3). Because a portion of a stock-option order is executed 
on a different platform (CBSX), it is more practical to execute resting 
stock-option orders against other stock-option orders received by the 
system first before scanning for executions against the legs on the 
CBSX book and the options Hybrid book.
    The third difference involves the manner in which stock-option 
orders are executed through the COA. Individual orders and quotes for 
the various legs of the order will have last priority. Again, this is 
because it is more practical to execute resting stock-option orders 
against other stock-option orders received by the system first before 
scanning for executions against the legs on the CBSX book and the 
options Hybrid book.

    For example: the market for XYZ stock on CBSX is $39.94-39.99. 
The 45 call market on CBOE is $0.95-1.00. A stock-option order is 
entered to buy 100 shares and sell the 45 call with a net price of 
$39.00. The stock-option order is auctioned through the COA, but no 
responses are received (if responses had been received, priority 
would have been afforded to public customer responses and any 
resting public customer stock-option orders that were marketable 
against the auctioned order using time priority). After the system 
has determined that there are no responses or resting stock-option 
orders that can trade against the auctioned stock-option order, it 
will look to the individual leg markets. In this case, the stock-
option order will be filled by the system by executing the stock at 
$39.99 against the CBSX book and the option at $1 against the CBOE 
book.

    With respect to the last difference, the N-second group timer shall 
not be in effect for stock-option orders.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\4\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\5\ 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. In particular, the Exchange believes that the addition of 
stock-option orders to the list of complex orders eligible for 
electronic handling under CBOE Rule 6.53C is a significant enhancement 
for investors seeking automated handling of stock-option orders.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 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

[[Page 61696]]

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

    The Exchange neither solicited nor received comments on the 
proposal.

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 Exchange 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-2007-68 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-2007-68. 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 the 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-2007-68 and should be 
submitted on or before November 21, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-21383 Filed 10-30-07; 8:45 am]

BILLING CODE 8011-01-P
