

[Federal Register: December 28, 2007 (Volume 72, Number 248)]
[Notices]               
[Page 73921-73923]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de07-185]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57012; File No. SR-CBOE-2007-03]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment 
No. 1 Thereto Amending its Obvious Error Rule for Options on Indices, 
ETFs, and HOLDRS

December 20, 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 February 21, 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 December 20, 2007, the CBOE submitted 
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.
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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 CBOE Rule 24 .16, which is the 
Exchange's rule applicable to the nullification and adjustment of 
transactions in index options, options on exchange-traded funds 
(``ETFs''), and options on HOLding Company Depository ReceiptS 
(``HOLDRS''). The Exchange is proposing to amend the rule in order to: 
(i) Modify the nullification and adjustment provisions for erroneous 
prints and erroneous quotes in the underlying; (ii) eliminate the 
nullification and adjustment provision for trades below intrinsic 
value; and (iii) modify the nullification provision for no bid series. 
The text of the proposed rule change is available at the Exchange, the 
Commission's Public Reference Room, and http://www.cboe.com.


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 make various amendments to CBOE Rule 
24.16, which is its obvious error rule pertaining to index options, 
options on ETFs, and options on HOLDRS. First, the proposal would 
modify the rule's provisions pertaining to erroneous prints and 
erroneous quotes in the underlying. Currently, the rule provides that a 
trade resulting from an erroneous print disseminated in the underlying 
market which is later cancelled or corrected by that underlying market 
may be adjusted or nullified.\3\ Similarly, the rule also provides that 
a trade resulting from an erroneous quote in the underlying security 
may be adjusted or nullified.\4\ Under the revised rule, the 
appropriate Exchange committee would identify particular underlying or 
related instrument(s) that would be used to determine an erroneous 
print or quote and would also identify the relevant market(s) trading 
the underlying or related instrument to which the Exchange would look 
for purposes of applying the obvious error analysis. The underlying or 
related instrument(s) may include the underlying or related ETF(s), 
HOLDRS(s), and/or index value(s),\5\ and/or related futures 
product(s),\6\ and the relevant underlying market(s) may include one or 
more markets. The underlying or related instrument(s) and relevant 
market(s) would be designated by the appropriate Exchange committee and 
announced to the membership via Regulatory Circular. For a particular 
ETF, HOLDRS, index value, and/or futures product to qualify for 
consideration as a ``related instrument,'' the revised rule requires 
that: (i) The option class and related instrument must be derived from 
or designed to track the same underlying index; or (ii) in the case of 
S&P 100-related options, the options class and related instrument must 
be derived from or designed to track the S&P 100 Index or the S&P 500 
Index. Thus, as an example for illustrative purposes only, for options 
on the Nasdaq 100 Index Tracking Stock (ETF option symbol ``QQQ'') , 
the appropriate Exchange committee may determine to designate the 
underlying Nasdaq 100 ETF and the primary market where it trades, as 
well as a related futures product overlying the Nasdaq 100 Index and 
the primary market where that futures product trades, as the 
instruments that would be considered by the Exchange in determining 
whether an erroneous print or an erroneous quote has occurred that 
would form the basis for an adjustment or nullification to a 
transaction in the related options.\7\
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    \3\ Under the current rule, to be adjusted or nullified, the 
trade must be the result of an erroneous print that is higher or 
lower than the average trade in the underlying security during a 
two-minute period before and after the erroneous print by an amount 
at least five times greater than the average quote width for such 
underlying security during the same period. See CBOE Rule 
24.16(a)(3). 3
    \4\ Under the current rule, an erroneous quote occurs when the 
underlying security has a width of at least $1.00 and has a width at 
least five times greater than the average quote width for such 
underlying security on the primary market during the time period 
encompassing two minutes before and after the dissemination of such 
quote. See Rule 24.16(a)(4).
    \5\ An ``index value'' is the value of an index as calculated 
and reported by the index's reporting authority. Use of an index 
value would only be applicable for purposes of identifying an 
erroneous print in the underlying (and not an erroneous quote). See 
proposed changes to CBOE Rule 24.16(a)(3).
    \6\ To confirm, the Exchange states that it is only proposing 
that it may designate underlying or related ETF(s), HOLDRS(s), and/
or index value(s), and/or related futures product(s). The Exchange 
states that it is not proposing to designate any of the individual 
underlying stocks (or related options or futures on any of the 
individual underlying stocks) that comprise a particular ETF, HOLDR, 
or index (any such proposal would be the subject of a separate rule 
filing).
    \7\ Using this example, under the revised rule, the designated 
instruments and markets would be announced by Regulatory Circular. 
Thereafter, for a transaction in the QQQ options class to be 
adjusted or nullified due to an erroneous print in an underlying or 
related instrument that is later cancelled or corrected, the trade 
must be the result of: (i) An erroneous print in the underlying 
Nasdaq 100 ETF that is higher or lower than the average trade in the 
underlying Nasdaq 100 ETF on the primary market during a two-minute 
period before and after the erroneous print by an amount at least 
five times greater than the average quote width for the ETF during 
the same period; or (ii) an erroneous print in the designated 
futures product overlying the Nasdaq 100 Index that is higher or 
lower than the average trade in the designated futures product on 
the designated market during a two-minute period before and after 
the erroneous print by an amount at least five times greater than 
the average quote width for the futures product during the same 
period. See proposed changes to CBOE Rule 24.16(a)(3). For an 
options transaction to be adjusted or nullified due to an erroneous 
quote in an underlying or related instrument, an erroneous quote 
would occur when: (i) The underlying Nasdaq 100 ETF has a width of 
at least $1.00 and has a width at least five times greater than the 
average quote width for such ETF on the primary market during the 
time period encompassing two minutes before and after the 
dissemination of such quote; or (ii) the designated futures product 
overlying the Nasdaq 100 Index has a width of at least $1.00 and has 
a width at least five times greater than the average quote width for 
such futures product on the designated market during the period 
encompassing two minutes before and after the dissemination of such 
quote. See proposed changes to CBOE Rule 24.16(a)(4).

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[[Page 73922]]

    As another example for illustrative purposes only, for the 
Exchange's class of options on the S&P 100 Index (index option symbol 
``OEX''), the appropriate Exchange committee may determine to designate 
the following underlying or related instruments: the S&P 100 Index 
value as calculated and reported by Standard and Poor's (the index's 
reporting authority); the S&P Depository Receipts traded on the 
American Stock Exchange; and the S&P 500 futures contract traded on the 
Chicago Mercantile Exchange.\8\
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    \8\ Using this example, under the revised rule, the designated 
instruments and markets would be announced by Regulatory Circular. 
Thereafter, for a transaction in the OEX options class to be 
adjusted or nullified due to an erroneous print in an underlying or 
related instrument that is later cancelled or corrected, the trade 
must be the result of: (i) An erroneous report of the underlying S&P 
100 Index value that is higher or lower than the average price in 
the index during a two-minute period before and after the erroneous 
report by an amount at least five times higher or lower than the 
difference between the highest and lowest index values during the 
same period; or (ii) an erroneous print in the S&P Depository 
Receipts or S&P 500 futures contract, as applicable, that is higher 
or lower than the average trade in the designated instrument during 
a two-minute period before and after the erroneous print by an 
amount at least five times greater than the average quote width for 
the designated instrument during the same period. See proposed 
changes to CBOE Rule 24.16(a)(3). To be adjusted or nullified due to 
an erroneous quote in the underlying or related instrument, an 
erroneous quote would occur when the S&P Depository Receipts or S&P 
500 futures contract, as applicable, has a width of at least $1.00 
and has a width at least five times greater than the average quote 
width for such instrument on the relevant market during the time 
period encompassing two minutes before and after the dissemination 
of such quote. See proposed changes to CBOE Rule 24.16(a)(4) and 
note 5 supra.
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    The Exchange states that the proposed change is intended to address 
member feedback and to provide relief in those scenarios where an 
erroneous options transaction may occur as the result of an erroneous 
print or erroneous quote in markets other than the primary market for 
the underlying security. The Exchange believes the proposed change 
recognizes that market participants trading in the overlying index, 
ETF, and HOLDRS options may base their options prices on trading in 
various products and markets, while maintaining reasonable and 
objective criteria for these types of obvious error reviews.
    Second, the proposal would eliminate the nullification and 
adjustment provision for trades below intrinsic value. CBOE Rule 
24.16(a)(5) currently states that an obvious pricing error will be 
deemed to have occur when the transaction price of an option series is 
more than $0.10 below the intrinsic value of the same option. The 
purpose of deleting this provision is to account for circumstances 
under which options are correctly priced $0.10 or more below the 
intrinsic value. For example, this might occur in options with 
underlying securities that are hard-to-borrow, extremely volatile 
issues where one market participant seeks to transfer the risk of 
selling or buying a security to other market participants by trading 
options, and options that are European-style exercise thus preventing 
exercise prior to expiration. Additionally, the Exchange notes that 
elimination of this provision is consistent with the Exchange's current 
rule for equity options, which does not have an obvious error review 
for trades below intrinsic value.\9\
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    \9\ See CBOE Rule 6.25.
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    Third, the proposal would modify the nullification provision for no 
bid series. Currently, the rule simply provides that electronic 
transactions in series that are quoted no bid on the Exchange are 
subject to nullification provided that at least one strike price below 
(for calls) or above (for puts) in the same options class was quoted no 
bid at the time of execution. Under the revised rule, additional 
criteria and clarifying language would be added. Specifically, an 
electronic transaction in a series quoted no bid on the Exchange would 
be subject to nullification provided: (i) The bid in that series 
immediately preceding the execution was, and for five seconds prior to 
the execution remained, zero; and (ii) at least one strike price below 
(for calls) or above (for puts) in the same options class was quoted no 
bid and offered at the same price or lower as that series at the time 
of execution. Thus, for example, if a trade occurs in the ABC 45 call 
option series when the series was quoted $0.00--$0.10, the trade may be 
nullified if: (i) The bid was at $0.00 for at least five seconds prior 
to the execution; and (ii) at least one call option series in ABC with 
a strike below 45 (e.g., the ABC 30, 35 or 40 call option series) had a 
bid of $0.00 and an offer of $0.10 or less at the time of execution.
    The revised no bid provision would provide that, when determining 
the Exchange's quotes in the relevant series, bids and offers of the 
parties to the subject trade that are in any of the series in the same 
options class shall not be considered. The revised rule would also 
provide that each group of series in an options class with a non-
standard deliverable will be treated as a separate options class. Thus, 
for example, if due to a reorganization certain of the series in the 
ABC option class have a deliverable of 150 shares per options contract 
(as compared to the standard 100 shares per option contract), all ABC 
option series that are subject to the 150 contract delivery 
requirements would be considered separately from the ABC option series 
that are subject to the 100 contract delivery requirements for purposes 
of applying the no bid provision. Finally, the revised rule would 
clarify that the no bid provision is intended to apply to series quoted 
no bid on the Exchange (as opposed to series for which the national 
best bid is quoted no bid).\10\
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    \10\ Consistent with the existing provisions, for a 
nullification to be granted, any member or person associated with a 
member that believes it participated in a transaction that falls 
within the no bid series parameters must also satisfy the 
notification procedures set forth in paragraph (b) of CBOE Rule 
24.16.
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    The proposed changes to the no bid provision are intended to 
address the Exchange's experience in applying the provision to 
particular trading scenarios that have occurred. The Exchange believes 
that the additional criteria and clarifications are reasonable and 
objective, and would serve to better identify instances where the no 
bid provision is intended to apply.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act,\11\ in general, and furthers the objectives of 
section 6(b)(5) of the Act,\12\ in particular, in that it is designed 
to promote just and equitable principles of trade, prevent fraudulent 
and manipulative acts, remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 73923]]

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 by the Exchange 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 Exchange consents, the Commission will:
    A. By order approve the 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-2007-03 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-2007-03. 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-2007-03 and should be 
submitted on or before January 18, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25198 Filed 12-27-07; 8:45 am]

BILLING CODE 8011-01-P
