

[Federal Register: December 11, 2007 (Volume 72, Number 237)]
[Notices]               
[Page 70356-70357]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de07-81]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56903; File No. SR-CBOE-2007-68]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Stock-Option Orders

December 5, 2007.

I. Introduction

    On June 20, 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 proposal to amend its rules to provide for the 
electronic handling and execution of stock-option orders. The CBOE 
filed Amendment No. 1 to the proposal on October 19, 2007.\3\ The 
proposed rule change, as modified by Amendment No. 1, was published for 
comment in the Federal Register on October 31, 2007.\4\ The Commission 
received no comments regarding the proposed rule change, as amended. 
This order approves the proposed rule change, as modified by Amendment 
No. 1.
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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.
    \4\ See Securities Exchange Act Release No. 56701 (October 25, 
2007), 72 FR 61694.
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II. Description of the Proposal

    Currently, stock-option orders \5\ are handled manually on the CBOE 
and the options component is traded in open outcry. The CBOE proposes 
to amend CBOE Rule 6.53C, ``Complex Orders on the Hybrid System,'' to 
allow stock-option orders to be submitted to the Complex Order Book 
(``COB'') or executed via a Complex Order Auction (``COA'').\6\ The 
stock component of a stock-option order will be executed electronically 
on the CBOE's electronic stock trading facility, the CBOE Stock 
Exchange (``CBSX''), consistent with CBSX's order execution rules.\7\ A 
stock-option order will not be executed on the CBOE's Hybrid System 
unless the stock leg is executable on CBSX at the price(s) necessary to 
achieve the desired net price.\8\
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    \5\ A stock-option order is an order to buy or sell a stated 
number of units of an underlying or a related security coupled with 
either (a) the purchase or sale of option contract(s) on the 
opposite side of the market representing either the same number of 
units of the underlying or related security or the number of units 
of the underlying security necessary to create a delta neutral 
position or (b) the purchase or sale of an equal number of put and 
call option contracts, each having the same exercise price, 
expiration date and each representing the same number of units of 
stock as, and on the opposite side of the market from, the 
underlying security or related security portion of the order. See 
CBOE Rule 1.1(ii) and CBOE Rule 6.53C(a)(10).
    \6\ See CBOE Rule 6.53C, Commentary .06 (c) and (d).
    \7\ See CBOE Rule 6.53C, Commentary .06(a).
    \8\ See CBOE Rule 6.53C, Commentary .06(a).
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    An electronic stock-option order accepted by the Hybrid System will 
be auctioned in a COA when the requirements for an auction are met. An 
unexecuted stock-option order also could be maintained in the COB or on 
a PAR workstation, either of which would monitor the marketability of 
the order, taking into account the CBSX market for the execution of the 
stock component of the order.
    Under the proposal, the CBOE proposes to process stock-option 
orders in a manner that is substantially similar to the way that the 
CBOE currently processes complex orders comprised solely of options. 
However, a stock-option order submitted to the COB would seek to trade 
first against other stock-option orders in the COB, and second against 
individual orders or quotes on the CBOE.\9\ Similarly, a stock-option 
order submitted to a COA would trade in the sequence set forth in CBOE 
Rule 6.53C(d)(v)(1)-(4), except that subparagraph (d)(v)(1), relating 
to individual orders and quotes residing in the EBook, would be applied 
last in sequence.\10\ The CBOE believes that because a portion of a 
stock-option order would be executed on a different platform (CBSX), it 
is more practical to execute resting stock-option orders against other 
stock-option orders received by the Hybrid System before scanning for 
executions against the legs on the CBSX book and the Hybrid options 
book.
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    \9\ See CBOE Rule 6.53C, Commentary .06(c). In contrast, a 
complex order comprised solely of options would seek to execute 
first against orders and quotes in the EBook, if possible, and then 
against other complex orders in the COB. See CBOE Rule 6.53C(c)(ii).
    \10\ See CBOE Rule 6.53C, Commentary .06(d).
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    The options leg of a stock-option order will not trade ahead of any 
public customer option resting on the Hybrid book. Specifically, the 
options leg of a stock-option order will not be executed on the Hybrid 
System at the CBOE's best bid (offer) in a series if one or more public 
customer orders are resting on the electronic book at that price, 
unless the options leg trades with such public customer order(s).\11\ 
Accordingly, the CBOE notes that the proposal is consistent with CBOE 
Rule 6.45A(b)(iii), which provides the options leg of a stock-option 
order with priority over bids (offers) in the trading crowd at the same 
price, but not over public customer bids (offers) in the limit order 
book at the same price.\12\
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    \11\ See CBOE Rule 6.53C, Commentary .06(b).
    \12\ The CBOE provides the following example to illustrate how 
the Hybrid System would protect the priority of a resting public 
customer options order: a customer enters a stock-option order to 
buy 100 shares of XYZ (trading at around $40) and sell a 45 call 
with a net price of $39.00. A public customer order to sell the 45 
call for $1 is resting on the Hybrid book. When executing the stock-
option order against auction responses, the Hybrid System will not 
allow the options 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 options leg prints at $0.99 and 
the stock trade prints at $39.99, in accordance with CBSX priority 
rules. This execution would meet the stock-option order's limit 
price and would not violate priority on CBOE or CBSX.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds that the 
proposal is consistent with section 6(b)(5) of the Act,\14\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market

[[Page 70357]]

system, and, in general, to protect investors and the public interest.
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    \13\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal could facilitate the 
execution of stock-option orders on the CBOE by providing for the 
electronic handling and execution of these orders, which currently must 
be handled manually. The Commission notes that proposal provides for 
the execution of stock-option orders in a manner that is consistent 
with the CBOE's existing priority rules for stock-option orders, which 
provide the options leg of a stock-option order with priority over bids 
(offers) in the trading crowd at the same price, but not over public 
customer bids (offers) at the same price.\15\ In addition, the 
execution of the stock component of a stock-option order on CBSX will 
be consistent with CBSX's order execution rules.\16\
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    \15\ See CBOE Rule 6.45A(b)(iii).
    \16\ See CBOE Rule 6.53C, Commentary .06(a).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2007-68), as modified 
by Amendment No. 1, is approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-23925 Filed 12-10-07; 8:45 am]

BILLING CODE 8011-01-P
