
[Federal Register: August 26, 2008 (Volume 73, Number 166)]
[
Notices]               
[Page 50376-50379]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au08-101]                         

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SECURITIES AND EXCHANGE COMMISSION



[Release No. 58387; File No. SR-CBOE-2008-83]



 
Self-Regulatory Organizations; Chicago Board Options Exchange, 

Incorporated; Notice of Filing and Immediate Effectiveness of a 

Proposed Rule Change Related to Complex Order Price Check Parameters



August 19, 2008.

    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 August 19, 2008, the Chicago Board Options Exchange, Incorporated 

``Exchange'' or (``CBOE'') 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 prepared by the 

Exchange. The Exchange filed the proposal as a (``non-controversial'') 

proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act 

\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing 

this notice to solicit comments on the proposed rule change from 

interested persons.

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    \1\ 15 U.S.C. 78s(b)(1).

    \2\ 17 CFR 240.19b-4.

    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).

    \4\ 17 CFR 240.19b-4(f)(6).

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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 Rule 6.53C, Complex Orders on the 

Hybrid System, to codify an automated system feature that prevents 

complex order executions from occurring at potentially erroneous 

prices. The text of the proposed rule change is available on the 

Exchange's Web site (http://www.cboe.org/Legal ), at the Exchange's 

Office of the Secretary 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 self-regulatory organization 

included



[[Page 50377]]



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 those 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 parts of 

such statements.



A. Self-Regulatory Organization's Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule Change



1.Purpose

    Complex orders that are eligible for automatic execution through 

the CBOE's electronic complex order book (``COB'') may be automatically 

executed in accordance with the provisions of Rule 6.53C. Complex 

orders that are not eligible to route to COB route to PAR. The purpose 

of the proposed rule change is to amend Rule 6.53C to codify a 

description of new complex order price check parameter functionality, 

which is a functionality that could be activated in certain series of a 

given options class that would prevent an automatic execution of a 

complex order from occurring at a potentially erroneous price. The 

complex order price check parameter is designed to help maintain a fair 

and orderly market. The functionality would prevent executions from 

automatically occurring in three types of scenarios:

Market Width Scenarios

    COB would not automatically execute complex orders that are market 

orders if (i) the width between the Exchange's best bid and best offer 

in any individual series leg is not within an acceptable price range, 

or (ii) the width between the Exchange's best net priced bid and best 

net priced offer in the individual series legs comprising the complex 

order is not within an acceptable price range. The applicable price 

ranges will be determined by the Exchange on an individual series leg 

basis for each series comprising the complex order and on a net price 

basis based on the sum of each individual series leg of the complex 

order, as applicable, and will be announced to the membership via 

Regulatory Circular generally at least one day in advance. For purposes 

of this provision, an ``acceptable price range'' shall be based on no 

less than 1.5 times the corresponding bid/ask differentials for the 

individual series legs as set forth in Rule 8.7(b)(iv)(A).\5\ In 

addition, the Exchange is proposing that the senior official in CBOE's 

Control Room or two Floor Officials may grant intra-day relief by 

widening the acceptable price range. Any such intra-day changes will be 

announced to the membership when granted. Market orders (in whole or in 

part) that trigger the applicable complex order price check parameters 

and, thus, that are not eligible for automatic execution, will be 

routed on a class by class basis to PAR, BART, or at the order entry 

firm's discretion to the order entry firm's booth printer. Thus, if 

part of a market order may be executed within an acceptable price 

range, that part of the order will be executed automatically and the 

part of the order that would execute at a price outside the acceptable 

price range will be routed as described above.

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    \5\ Rule 8.7(b)(iv)(A) sets forth the bid/ask differentials for 

open outcry trading in an individual series, which are as follows: 

No more than $0.25 between the bid and offer for each option 

contract for which the bid is less than $2, no more than $0.40 where 

the bid is at least $2 but does not exceed $5, no more than $0.50 

where the bid is more than $5 but does not exceed $10, no more than 

$0.80 where the bid is more than $10 but does not exceed $20, and no 

more than $1.00 where the bid is more than $20.

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    For illustrative purposes, assume the Exchange determines to set a 

price check parameter for the series of a class that provides that 

complex orders would not automatically execute if they are market 

orders and (i) the width between the Exchange's best bid and best offer 

in any individual series leg is 2 x the standard bid/ask differential, 

or (ii) the width between the Exchange's best net bid and best net 

offer in the individual series legs is greater than or equal to 1.5 x 

the standard bid/ask differential for the individual series legs.\6\



    \6\ Following from the example above, on an intra-day basis the 

senior official or two Floor Officials may determine based on market 

conditions to grant relief by widening the applicable individual 

series or net priced price check parameters (e.g., the ranges for 

the individual series and/or net priced price check parameters might 

be temporarily widened to 3 X).



    Example 1:  Assume a complex order to buy Series A and sell 

Series B is routed to COB. Also assume at that time the best bid and 

offer (``;BBO'' in Series A is $1.00-$1.60 (wider than the 2 X 

series parameter), the BBO in Series B is $3.00-$3.10 (within the 2 

X series parameter). Because the bid/ask differential in Series A 

($0.60) is greater than 2 X the applicable standard bid/ask 

differential for the series,\7\ the price check parameter will be 

triggered. The incoming complex order will not automatically execute 

in COB and will instead route to PAR, BART or the booth.

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    \7\ 2 X the standard bid/ask differentials would be as follows: 

$0.50 between the bid and offer for each option contract for which 

the bid is less than $2, $0.80 where the bid is at least $2 but does 

not exceed $5, $1.00 where the bid is more than $5 but does not 

exceed $10, $1.60 where the bid is more than $10 but does not exceed 

$20, and $2.00 where the bid is more than $20.

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    Example 2:  Assume a complex order to buy Series A and sell 

Series B is routed to COB. Also assume at the time the BBO in Series 

A is $1.00-$1.40 (within the 2 X series parameter), the BBO in 

Series B is $2.00 -$2.60 (within the 2 X series parameter). Because 

the net price bid/ask differential for the two series ($1.00) is 

greater than 1.5 x the applicable standard bid/ask differential for 

the series ($0.975), the price check parameter will be triggered. 

The incoming complex order will not automatically execute in COB and 

will instead route to PAR, BART or the booth.

    Example 3:  Assume a complex order to buy 50 Series A contracts 

and sell 50 Series B contracts is routed to COB. Also assume at that 

time the BBO in Series A is $1.00-$1.20 (within the 2 X series 

parameter) for 100 contracts, the BBO in Series B is $2.00-$2.20 

(within the 2 X series parameter) for 10 contracts, and the next 

available bid in Series B is $0.05 for 100 contracts. The incoming 

complex order would execute paying $1.20 for 10 Series A contracts 

and collecting $2.00 for 10 Series B contracts. When the market in 

Series B decrements to $0.05-$2.20, the price check parameter would 

be triggered for any one of three reasons: the width of Series B 

is$0.05-$2.20 (wider than the 2 X series parameter), the net price 

width of Series A and B is $2.35 (wider than the 2 X net price 

parameter of $1.30), and the net price has moved from a credit to 

debit (discussed below). The balance of the incoming complex order 

will route to PAR, BART or the booth.

Credit-to-Debit (Debit-to-Credit) Scenarios

    In classes designated by the Exchange, COB would not automatically 

execute market orders that would be executed at a net credit (debit) 

price after receiving a partial execution at a net debit (credit) 

price. The remaining balance of any such market orders that trigger 

this complex order price check parameters will be routed on a class by 

class basis to PAR, BART, or at the order entry firm's discretion to 

the order entry firm's booth printer. The designated classes for which 

this price check parameter is activated will be announced to the 

membership via Regulatory Circular.

    Example 3 above illustrates the operation of this parameter. In the 

example, the incoming order would initially receive an execution for 10 

spreads at a net credit price of $0.80 each (i.e., the net sale 

proceeds from Series B are larger than the net purchase cost from 

Series A). When the bid in Series B decrements to $0.05, the net 

execution price would become a net debit price of $1.15 each (i.e., the 

net sale proceeds from Series B are less than the net purchase cost 

from Series A). Such an execution would appear to be erroneous because 

normally a person in



[[Page 50378]]



this scenario would expect to execute its entire market order at a net 

credit price.

Vertical Scenarios

    In classes designated by the Exchange, COB would not automatically 

execute certain vertical complex orders \8\ that appear to be 

erroneously priced. This functionality is designed to detect and 

prevent executions in limited scenarios where (i) a market order would 

be executed at a net debit price when it clearly should be executed at 

a net credit price (but not vice versa),\9\ and (ii) a order is entered 

at a net credit price when it clearly should have been entered at a net 

debit price (or vice versa). Specifically, a market order that would 

trade at a net (debit) price or a complex order priced at net credit 

(debit) price that consists of at least two series legs would be 

automatically rejected by COB if the complex order would result in an 

execution to:

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    \8\ As referenced herein, a ``vertical'' complex order is one in 

which all the component series have the same expiration date.

    \9\ A vertical market order that would result in an execution at 

a net credit price (i.e., the net sale proceeds from the series 

being sold are more than the net purchase cost from the series being 

bought) but that would normally execute at a net debit price (i.e., 

the net sale proceeds from the series being sold are less than the 

net purchase cost from the series being bought) would be a favorable 

execution for the market order and would not trigger this price 

check parameter.

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     Buy (sell) a number of call option contracts and sell 

(buy) the same number or applicable ratio (as determined by the 

Exchange on a class by class basis) of call option contracts in a 

series with the same underlying security and expiration date but a 

higher exercise price; or

     Buy (sell) a number of put option contracts and sell (buy) 

the same number or applicable ratio (as determined by the Exchange on a 

class by class basis) of put option contracts in a series with the same 

underlying security and expiration date but a lower exercise price.

    As with the other price check parameters, the designated classes 

for which this parameter is activated, as well as any applicable ratio, 

will be announced to the membership via Regulatory Circular. If these 

conditions exist when an order is routed to COB, the complex order will 

be rejected. To the extent the parameters are triggered once an order 

is resting in COB or after an incoming order receives a partial 

execution, such complex orders will be routed on a class by class basis 

to PAR, BART, or at the order entry firm's discretion to the order 

entry firm's booth printer. The following examples illustrate this 

price check parameter:



    Example 1:  Assume a complex order to buy 50 Jan 45 XYZ calls 

and sell 50 Jan 50 XYZ calls is entered at a net credit price (i.e., 

the net sale proceeds from the Jan 50 calls are larger than the net 

purchase cost from the Jan 45 calls). Such an order would appear to 

be erroneously priced as a net credit--it should instead be a net 

debit--because normally a person would expect that the Jan 50 calls 

would not cost more than the Jan 45 calls.

    Example 2: Assume a butterfly spread to buy 50 Jan 45 XYZ calls, 

sell 100 Jan 50 XYZ calls and buy 50 Jan 55 XYZ calls is entered at 

a net credit price (i.e., the net sale proceeds from the Jan 50 

calls are more than the net purchase cost from the Jan 45 and 55 

calls). Such an order would appear to be erroneously priced as a net 

credit--it should instead be a net debit--because normally a person 

would expect that selling the middle 50 strike would result in less 

than the cost of buying the upper 55 and lower 45 strikes.

    Example 3:  Assume a market order to buy 50 Jan 45 XYZ calls and 

sell 50 Jan 40 XYZ calls is entered. Also assume that the Jan 45 XYZ 

calls are quoted $4.00-$4.10 for 10 contracts and the next available 

offer is $4.30 for 100 contracts, and that the Jan 40 XYZ calls are 

quoted $4.50-$4.60 for 10 contracts and the next available bid is 

$4.20 for 100 contracts. The incoming market order would receive an 

execution for 10 spreads at a net credit price of $0.40 each (i.e., 

the net sale proceeds from the Jan 40 Series are larger than the net 

purchase cost from the Jan 45 Series). When the series decrement, 

the net execution price would become a net debit price of $0.10 each 

(i.e., the net sale proceeds from the Jan 40 Series are less than 

the net purchase cost from the Jan 45 Series). Such an execution 

would appear to be erroneous because normally a person in this 

scenario would expect to execute the vertical spread at a net credit 

price.

2. Statutory Basis

    The Exchange believes the proposed rule change is consistent with 

the Act \10\ and the rules and regulations under the Act applicable to 

national securities exchanges and, in particular, the requirements of 

section 6(b) of the Act.\11\ Specifically, the Exchange believes the 

proposed rule change is consistent with the section 6(b)(5) \12\ 

requirements that the rules of an 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. The proposed 

rule change will contribute to the maintenance of fair and orderly 

markets because it will provide an automated process for preventing 

potentially erroneous executions in complex orders from occurring.

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    \10\ 15 U.S.C. 78s(b)(1).

    \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



    CBOE 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.



C. Self-Regulatory Organization's Statement on Comments on the Proposed 

Rule Change Received From Members, Participants or Others



    The Exchange neither solicited nor received comments on the 

proposal.



III. Date of Effectiveness of the Proposed Rule Change and Timing for 

Commission Action



    Because the foregoing rule does not (i) significantly affect the 

protection of investors or the public interest; (ii) impose any 

significant burden on competition; and (iii) become operative for 30 

days from the date on which it was filed, or such shorter time as the 

Commission may designate if consistent with the protection of investors 

and the public interest, provided that the self-regulatory organization 

has given the Commission written notice of its intent to file the 

proposed rule change at least five business days prior to the date of 

filing of the proposed rule change or such shorter time as designated 

by the Commission, the proposed rule change has become effective 

pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 

thereunder.\14\ At any time within 60 days of the filing of such 

proposed rule change, the Commission may summarily abrogate such rule 

change if it appears to the Commission that such action is necessary or 

appropriate in the public interest, for the protection of investors, or 

otherwise in furtherance of the purposes of the Act.

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    \13\ 15 U.S.C. 78s(b)(3)(A).

    \14\ 17 CFR 240.19b-4(f)(6).

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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-2008-83 on the subject line.



[[Page 50379]]



Paper Comments



     Send paper comments in triplicate to Secretary, Securities 

and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.



All submissions should refer to File Number SR-CBOE-2008-83. 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, on official business 

days between the hours of 10 a.m. and 3 p.m. Copies of the 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-2008-83 and should be submitted on or before September 16, 2008.



    For the Commission, by the Division of Trading and Markets, 

pursuant to delegated authority.\15\

Florence E. Harmon,

Acting Secretary.

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    \15\ 17 CFR 200.30-3(a)(12).

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 [FR Doc. E8-19706 Filed 8-25-08; 8:45 am]

BILLING CODE 8010-01-P
