

[Federal Register: November 26, 2007 (Volume 72, Number 226)]
[Notices]               
[Page 66008-66009]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26no07-80]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56814; File No. SR-CBOE-2007-87]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change, and Amendment 
No. 1 Thereto, To Amend the Quoting Requirements Applicable to the 
Hybrid Opening System

November 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 July 25, 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. On November 19, 2007, CBOE 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rule pertaining to the Hybrid Opening 
System (``HOSS'') as well as related rules pertaining to the 
obligations of designated primary market-makers (``DPMs''), electronic 
designated primary market-makers (``e-DPMs'') and lead market-makers 
(``LMMs'') during opening rotations. The text of the proposed rule 
change is available at the Exchange, on the Exchange's Web site (http://www.cboe.org
), 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
    The Exchange proposes to amend its HOSS procedures contained in 
CBOE Rule 6.2B. HOSS is the Exchange's automated system for initiating 
trading at the beginning of each trading day. Previously, for each 
option class approved for trading, HOSS had been programmed to open an 
option series only if the DPM or LMM, as applicable, for the particular 
option class submitted a quote that complies with the legal quote width 
requirements of paragraph (b)(iv) to CBOE Rule 8.7, Obligations of 
Market-Makers. The HOSS procedures were revised in 2005 and, currently, 
HOSS is programmed to open an option series as long as any market 
maker,\3\ not just the DPM or LMM, has submitted an opening quote that 
complies with the legal width quote requirements of CBOE Rule 
8.7(b)(iv).\4\ However, even though the procedures were changed to 
permit HOSS to automatically open a series without a DPM's or LMM's 
quote, DPMs (as well as e-DPMs) or LMMs still remain obligated under 
CBOE rules to timely submit opening quotes.\5\ The proposed rule change 
is designed to give some relief to DPMs, e-DPMs and LMMs from this 
opening quote requirement. Because HOSS is programmed to automatically 
open based on any market-maker's quote, the Exchange does not believe 
that DPMs, e-DPMs and LMMs should be viewed as violating the opening 
quote requirement when they inadvertently miss the opening simply 
because another market-maker entered a quote before the DPM, e-DPM or 
LMM.
---------------------------------------------------------------------------

    \3\ This could include a quote from a DPM, e-DPM, LMM, Market-
Maker or Remote Market-Maker.
    \4\ See Securities Exchange Act Release No. 52234 (August 10, 
2005), 70 FR 48214 (August 16, 2005) (SR-CBOE-2005-40). Other 
factors must also be satisfied for HOSS to open an options series. 
For example, the opening price for the series must be within an 
acceptable range and the opening trade cannot create a market order 
imbalance. See, e.g., CBOE Rule 6.2B(e)(ii)-(iii).
    \5\ Currently, DPMs, e-DPMs and LMMs 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 obligated, to enter 
opening quotes in accordance with CBOE Rule 6.2B. See existing 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, 8.93, e-DPM 
Obligations.
---------------------------------------------------------------------------

    In an effort to provide more flexibility to ensure that all options 
series are opening in a fair and orderly manner, the Exchange is 
proposing to modify the HOSS procedures and related opening quote 
obligations of DPMs, e-DPMs and LMMs to allow the parameters to be 
configured so that an option series will open: (i) If at least one 
market maker has submitted an opening quote (which is how HOSS 
currently operates) or (ii) only if a DPM or LMM, as applicable, has 
submitted an opening quote (which is how HOSS previously operated). 
Determinations on the particular configuration would be made on a 
class-by-class basis by the appropriate Exchange Procedure Committee 
and announced to the membership via Regulatory Circular. There will be 
no set factors for making the determinations; it will simply be the 
method the appropriate Exchange Procedure Committee thinks would work 
best to achieve a competitive, efficient and orderly opening in the 
particular class. The appropriate Exchange Procedure Committee might 
consider such things as trading in the underlying or related products, 
trading in the option on competing exchanges, how effectively opens 
have occurred in the past, liquidity and/or other factors. For example, 
if the Exchange desires to increase liquidity in a particular class on 
the open, the appropriate Exchange

[[Page 66009]]

Procedure Committee might determine to configure HOSS so that the DPM's 
quote must be present to open in order to ensure that there is 
sufficient liquidity available.
    The Exchange is also proposing that, in the event HOSS is 
configured to open a series based on any market maker's quote, the DPM 
and any e-DPMs appointed to the class or, as applicable, the LMMs 
appointed to the class, would be obligated to ensure that a trading 
rotation is initiated promptly following the opening of the underlying 
security (or promptly after 8:30 a.m. (Central Time) in an index class) 
in accordance with CBOE Rule 6.2B in 100% of the series of each 
allocated class by entering opening quotes as necessary. In other 
words, if another market maker has already entered an opening quote in 
a particular series, it would not be necessary for the DPM and e-DPM, 
or LMM, to enter an opening quote for HOSS to automatically open the 
series. However, if no other market maker has entered an opening quote, 
the DPM and e-DPM, or LMM, would be responsible for ensuring that an 
opening quote is promptly entered so that HOSS can automatically open 
the series. This obligation to ensure that an opening rotation is 
conducted promptly in an allocated class by entering opening quotes 
only as necessary will be in lieu of the existing obligation, which 
requires DPMs, e-DPMs and LMMs to enter opening quotes in 100% of the 
series of each allocated class.\6\ When HOSS is programmed to 
automatically open a series with any market maker's quote, the Exchange 
does not believe it is necessary for the maintenance of fair and 
orderly markets to always require DPMs, e-DPMs and LMMs to enter 
opening quotes.\7\
---------------------------------------------------------------------------

    \6\ See supra note 5.
    \7\ Although not obligated, DPMs, e-DPMs and LMMs would still be 
permitted to enter opening quotes even if another market maker has 
already entered an opening quote.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange states that, by allowing for more flexibility in the 
manner in which HOSS is programmed to conduct an opening rotation, it 
will enhance its ability to conduct fair and orderly openings. As such, 
CBOE believes this proposed rule change is consistent with section 6(b) 
of the Act \8\ in general and furthers the objectives of section 
6(b)(5) of the Act \9\ in particular, which requires that the rules of 
a national securities 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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-2007-87 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-2007-87. 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 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-2007-87 and should be 
submitted on or before December 17, 2007.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

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

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-22946 Filed 11-23-07; 8:45 am]

BILLING CODE 8011-01-P
