

[Federal Register: January 7, 2008 (Volume 73, Number 4)]
[Notices]               
[Page 1247-1248]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja08-63]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57067; File No. SR-CBOE-2007-87]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, To Amend the Quoting Requirements 
Applicable to the Hybrid Opening System

 December 31, 2007.
    On July 25, 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 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. On November 
19, 2007, CBOE filed Amendment No. 1 to the proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on November 26, 2007.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as modified by Amendment No. 1 thereto.
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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. 56814 (November 19, 
2007), 72 FR 66008 (``Notice'').
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I. Description of the Proposal

    HOSS is the Exchange's automated system for initiating trading at 
the beginning of each trading day. The Exchange proposes to amend its 
HOSS procedures contained in CBOE Rule 6.2B. 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. In 2005, the HOSS procedures were revised; currently, 
HOSS is programmed to open an option series as long as any market 
maker,\4\ 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).\5\ 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) and LMMs are still obligated under 
CBOE's rules to submit timely opening quotes.\6\
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    \4\ This could include a quote from a DPM, e-DPM, LMM, Market-
Maker or Remote Market-Maker.
    \5\ 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).
    \6\ 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 current 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, and 8.93, e-
DPM Obligations.
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    The proposed rule change modifies the HOSS procedures to allow the 
parameters to be configured so that an option series will open: (1) If 
at least one market maker has submitted an opening quote, which is how 
HOSS currently operates; or (2) only if a DPM or LMM, as applicable, 
has submitted an opening quote, which is how HOSS operated previously. 
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.\7\
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    \7\ See Notice, supra note 3, 72 FR at 66008 (noting that the 
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.'').
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    In addition, the proposed rule change amends the opening quote 
obligations of DPMs, e-DPMs, and LMMs to require them to ensure a 
timely initiation of an opening trading rotation of each allocated 
class by entering opening quotes as necessary (i.e., when no other 
market maker has entered an opening quote). This change would absolve 
DPMs, e-DPMs, and LMMs of their responsibility (under CBOE's current 
rules) to enter opening quotes when another market maker has already 
entered an opening quote in a particular series.\8\
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    \8\ Under CBOE's proposed rules, DPMs, e-DPMs, and LMMs would 
still be permitted to enter opening quotes even if another market 
maker has already entered an opening quote.
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II. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act 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, among other things, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating transactions in securities, to 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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    \9\ In approving this 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).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change will afford the Exchange more flexibility 
in the manner in which HOSS conducts opening rotations. The Commission 
believes that allowing the appropriate Exchange Procedure Committee to 
determine on a class-by-class basis how

[[Page 1248]]

a particular series should open may allow CBOE to achieve more 
competitive, efficient, and orderly openings, while allowing the 
Exchange to provide sufficient liquidity at the open in particular 
classes.
    While the Commission continues to believe that the quoting 
obligations of LMMs, DPMs, and e-DPMs are appropriate, given the 
benefits (such as favorable margin treatment) that are provided to 
market makers, the Commission also believes that it is reasonable for 
CBOE to excuse them from submitting opening quotes in their assigned 
series when at least one other market maker has already entered an 
opening quote in that series. The Commission notes that 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 proposal, 
in conjunction with another recently approved proposed rule change,\11\ 
also should encourage LMMs, DPMs, and e-DPMs to quote more 
competitively during HOSS opening rotations.\12\
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    \11\ See Securities Exchange Act Release No. 56860 (November 29, 
2007), 72 FR 68919 (December 6, 2007) (SR-CBOE-2007-59) (allowing 
market makers to enter an opening quote for as low as one contract 
if the underlying primary market disseminates less than a 1,000-
share best bid or offer quote immediately prior to an option series 
opening).
    \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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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2007-87), as modified 
by Amendment No. 1, 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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Nancy M. Morris,
Secretary.
[FR Doc. E7-25651 Filed 1-4-08; 8:45 am]

BILLING CODE 8011-01-P
