

[Federal Register: December 6, 2007 (Volume 72, Number 234)]
[Notices]               
[Page 68919-68920]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de07-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56860; File No. SR-CBOE-2007-59]

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

November 29, 2007.
    On September 17, 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 its minimum quote size 
requirements that are applicable to trading rotations conducted via the 
Hybrid Opening System (``HOSS''). The proposed rule change was 
published for comment in the Federal Register on October 25, 2007.\3\ 
The Commission received no comments on the proposal. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56680 (October 19, 
2007), 72 FR 60697 (``Notice'').
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    Currently, CBOE Rule 8.7 generally requires that the initial size a 
market maker electronically quotes must be at least ten contracts 
(undecremented size) (the ``10-up'' requirement).\4\ The Exchange 
proposes to amend CBOE Rule 6.2B to modify the minimum quote size 
requirements applicable to Market-

[[Page 68920]]

Makers, Remote Market-Makers, Designated Primary Market-Makers, 
Electronic Designated Primary Market-Makers and Lead Market-Makers 
(collectively referred to as ``Market-Makers'') \5\ with respect to 
opening rotations in CBOE Hybrid Trading System (``Hybrid'') classes. 
Specifically, the 10-up requirement 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 \6\ 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. In 
contrast to the intra-day quoting requirements under CBOE Rule 8.7, 
this exception would not require that the opening quote process be 
automated or that the Market-Maker's quote size automatically return to 
at least 10-up when the underlying primary market no longer 
disseminates a minimum 1000-share quote.
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    \4\ If, however, 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'') if the process is automated and the 
quote automatically returns to at least 10-up when the underlying 
market no longer disseminates a 100-share quote. See, e.g., CBOE 
Rule 8.7(d)(ii)(B).
    \5\ 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; 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 
(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, and 8.93.
    \6\ CBOE Rule 1.1(v) defines the term ``primary market'' of an 
underlying security as ``the principal market in which the 
underlying security is traded.''
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    The Commission notes that, while the Exchange believes that the 
existing opening quote size requirement imposes a reasonable obligation 
on Market-Makers who receive certain benefits for satisfying this and 
other obligations, the Exchange also believes that there are instances 
where requiring Market-Makers to quote 10-up during an opening rotation 
imposes a heightened level of risk on them.\7\ Accordingly, CBOE's 
proposal would provide limited relief from this quoting requirement 
during the opening rotation only.
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    \7\ See Notice, supra note 3, at 60698.
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    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6 of the Act \8\ and the rules and 
regulations thereunder applicable to a national securities exchange.\9\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\10\ which requires that a 
national securities exchange's rules be 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 Commission notes that 
Market-Makers hedge their options transactions by buying and/or selling 
the underlying securities. When the underlying primary market for the 
particular equity security on which a CBOE option is based disseminates 
less than a 1000-share quote during CBOE's opening rotation in the 
respective option series, the amount of readily-accessible liquidity 
available to a CBOE Market-Maker in the underlying security on that 
particular side of the market to hedge a 10-up quote in the respective 
option may potentially be limited. Correspondingly, Market-Makers' 
ability to hedge their positions at the open might be restricted, 
increasing their financial exposure and risk, particularly when the 
Market-Maker is required to quote over multiple series during the 
typically active open rotation period.\11\
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    \8\ 15 U.S.C. 78(f)(b).
    \9\ In approving this rule change, the Commission notes that it 
has considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ According to the Exchange, an options exchange may list 20 
or more options series for an underlying stock. For example, if a 
Market-Maker posts 10-up markets in twenty series, that Market-Maker 
would provide liquidity equivalent to 20,000 shares.
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    While the Commission continues to believe that CBOE's existing 
quote size requirements are appropriate, given the benefits that are 
provided to Market-Makers such as favorable margin treatment, the 
Commission also believes that it is reasonable to allow a limited 
exception for Market-Makers to lower their quote sizes to as low as one 
contract during opening rotations on HOSS when there is a diminished 
amount of liquidity in the underlying primary market. By permitting 
Market-Makers to limit their exposure at the opening, the Commission 
believes that this proposal may encourage Market-Makers to quote more 
competitively during HOSS opening rotations.\12\ The Commission notes 
that CBOE's proposal would permit Market-Makers to submit an opening 
quote for as low as one contract only in connection with opening 
rotations on HOSS, though a Market-Maker would be free to quote more if 
it so choose. Further, the proposal would permit a Market-Maker to 
maintain its 1-up quote during the opening rotation until it is 
decremented or the Market-Maker updates its quote, at which point 
CBOE's continuous quoting obligation rules would apply. Finally, the 
Commission believes that the proposal should not detract from CBOE's 
ability to maintain fair and orderly openings on HOSS because, to the 
extent that there may be a market order imbalance on the opening, such 
imbalances would continue to be addressed in the same manner as they 
are currently handled under existing CBOE rules.
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    \12\ Nothing in this proposal would affect a Market-Maker's 
obligation to honor its firm quote obligations imposed by CBOE Rule 
8.51.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2007-59) be, and hereby 
is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-23608 Filed 12-5-07; 8:45 am]

BILLING CODE 8011-01-P
