[Federal Register Volume 67, Number 30 (Wednesday, February 13, 2002)]
[Notices]
[Pages 6772-6774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3496]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45419; File No. SR-CBOE-2001-63]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Lead 
Market-Makers and Supplemental Market-Makers

February 7, 2002.
    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 December 17, 2001, the Chicago Board Options Exchange, Inc. 
(``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 prepared by the CBOE. 
The Exchange filed an amendment to the proposed rule change on February 
7, 2002.\3\ 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.
    \3\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Deborah Flynn, Assistant Director, Division of Market 
Regulation (``Division''), Commission (``Amendment No. 1''). 
Amendment No. 1 requests the Commission to designate the proposed 
rule change as having been filed pursuant to Section 19(b)(2) of the 
Act.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend its CBOE Rule 8.15 to make clear that 
Lead Market-Makers and Supplemental Market-Makers may determine a 
formula for generating automatically updated market quotations during 
the trading day. The text of the proposed rule change is set forth 
below. Additions are in italics; deletions are in brackets.
* * * * *

Rule 8.15. Lead Market-Makers and Supplemental Market-Makers

    The appropriate Market Performance Committee (the ``Committee'') 
may appoint one or more market-makers in good standing with an 
appointment in an option class [the S&P 100 options or in options on 
the DJIA] for which a DPM has not been appointed as Lead Market-Makers 
(``LMMs'') and Supplemental Market-Makers (``SMMs'') to participate in 
the modified opening rotation described in Interpretation .02 to Rule 
24.13, including participating in opening rotations using the 
Exchange's Rapid Opening System., and/or to determine a formula for 
generating automatically updated market quotations during the trading 
day as described in paragraph (d) below. 
    (a) LMMs and SMMs shall be appointed on the first day following an 
expiration for a period of one month (``expiration month'') and shall 
be assigned to a zone with one or more LMMs or SMMs. The Committee 
shall select the series to be included in a zone.
    1. Factors to be considered by the Committee in selecting LMMs and 
SMMs include: Adequacy of capital, experience in trading index options, 
presence in the [S&P] trading crowd, adherence to Exchange rules and 
ability to meet the obligations specified below. An individual may be 
appointed as an LMM in only one zone for an expiration month but may 
also be appointed as an SMM in other zones. An individual may be 
appointed to be an SMM in more than one zone. When individual members 
are associated with one or more other members, only one member may 
receive an LMM appointment.
    2.-4. No change.
    (b) The obligations of an LMM are as follows:
    1.-3. No change.
    4. to perform the above obligations for a period of one expiration 
month commencing on the first day following an expiration. Failure to 
perform such obligations for such time may result in suspension of up 
to three months from trading in all series of the [S&P 100] option 
class [or in options on the DJIA as appropriate].
    (c) No change.
    (d) Each LMM or SMM appointed in accordance with this Rule to 
determine a formula for generating automatically updated market 
quotations shall for the period in which its acts as LMM or SMM use the 
Exchange's AutoQuote system or a proprietary automated quotation 
updating system to update market quotations during the trading day. In 
addition, the LMM or SMM shall disclose the following components of the 
formula to the other members trading at the trading station at which 
the formula is used: option pricing calculation model, volatility, 
interest rate, dividend, and what is used to represent the price of the 
underlying. Notwithstanding the foregoing, the appropriate Market 
Performance Committee shall have the discretion to exempt LMMs and SMMs 
using proprietary automated quotation updating systems from having to 
disclose proprietary information concerning the formulas used by those 
systems.4
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    \4\ The Exchange has agreed to submit an amendment adding 
a cross-reference to Interpretation and Policy .07 to CBOE Rule 8.7 
to clarify that all of the requirements of Interpretation and Policy 
.07 apply to proposed CBOE Rule 8.15(d). Telephone call between 
Patrick Sexton, Assistant General Counsel, CBOE, and Deborah Flynn, 
Assistant Director, Division, Commission (February 6, 2002).
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* * * * *

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 CBOE 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 CBOE 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 purpose of the proposed rule change is to amend CBOE Rule 8.15 
to make explicit in the rule that the appropriate Market Performance 
Committee (``MPC'') may appoint Lead Market-Makers (``LMMs'') and 
Supplemental Market-Makers (``SMMs'') to determine a formula for 
generating automatically updated market quotations and to use the 
Exchange's Autoquote system or to provide a proprietary automated 
quotation updating system to monitor and automatically update market 
quotations

[[Page 6773]]

during the trading day in an options class for which a Designated 
Primary Market-Maker (``DPM'') has not been appointed. CBOE Rule 8.15 
currently provides that the appropriate MPC may appoint LMMs and SMMs 
for a specified period of time to participate in opening rotations in 
S&P 100 options (``OEX'') and options on the Dow Jones Industrial 
Average (``DJX'') pursuant to the terms of Interpretation .02 to CBOE 
Rule 24.13,\5\ including by employing the Exchange's Rapid Opening 
System (``ROS'').
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    \5\ The rules governing opening rotations in OEX were approved 
by the Commission on March 31, 1988. See Securities Exchange Act 
Release No. 25545 (March 31, 1988), 53 FR 11720 (April 8, 1988). The 
LMM system was put in place to allow for speedier openings in the 
OEX crowd and to add accountability to the openings in OEX by making 
particular market-makers responsible for opening quotes.
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    Historically, one of the factors considered by the appropriate MPC 
in selecting LMMs and SMMs to participate in the OEX openings is the 
willingness of a market-maker or market-maker group to provide 
automatically updated quotations during the trading day in the options 
series traded by the OEX crowd.\6\ In the early part of 2000, the Index 
Market Performance Committee (``IMPC'') introduced a proprietary 
automated quotation updating system (``Vendor Quote'') into the OEX 
trading crowd to replace the Exchange's Autoquote system.\7\ In 
conjunction with the introduction of the Vendor Quote system in the 
OEX, the IMPC instituted a program in OEX whereby the IMPC will approve 
a certain number of market-makers or market-maker groups to act as LMMs 
and SMMs and also to provide an intra-day proprietary quote feed to the 
Vendor Quote system. The Exchange proposes to amend CBOE Rule 8.15 to 
codify the practice of the appropriate MPC appointing LMMs and SMMs to 
provide automatically updated quotations during the trading day.
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    \6\ Paragraph (a)(1) of CBOE Rule 8.15 describes the factors to 
be considered by the appropriate MPC in making its selections for 
LMMs and SMMs. These factors include: Adequacy of capital, 
experience in trading index options, presence in the S&P trading 
crowd, adherence to Exchange rules, and ability to meet the 
obligations specified in the rule. One of the obligations of an LMM 
specified in the Rule is to quote a two-sided market during the 
opening in all option series in the LMM's assigned zone.
    \7\ The Vendor Quote system accepts a quote stream from a firm's 
proprietary quote system and then sends this quote information to 
the Exchange's Trading Support System to be disseminated as market 
quotes.
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    The CBOE proposed to amend Paragraph (a) of CBOE Rule 8.15 to state 
that LMMs and SMMs may be appointed by the appropriate MPC to determine 
a formula for generating automatically updated market quotations during 
the trading day in their appointed classes, in addition to 
participating in the opening rotations. Proposed new paragraph (d) 
provides that LMMs and SMMs appointed pursuant to the CBOE Rule 8.15 to 
determine a formula for generating automatically updated market 
quotations must for the period in which its acts as LMM or SMM use the 
Exchange's AutoQuote system or a proprietary automated quotation 
updating system to update market quotations during the trading day. 
Proposed paragraph (d) requires LMMs to disclose to the trading crowd 
the variables of the formula for generating automatically updated 
market quotations unless exempted by the appropriate Market Performance 
Committee. This new language tracks the language of Exchange Rule 
8.85(a)(x) regarding a DPM's obligation for generating and providing 
automatically updated market quotations, as well as disclosing to the 
trading crowd the variables of the formula.\8\
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    \8\ Since CBOE's establishment of the Modified Trading System 
pilot program in 1987 that allowed CBOE to assign DPMs to certain 
options classes, CBOE rules have provided that the DPM should 
determine and disclose to the trading crowd the elements of the 
formula for automatically updating quotations. See Securities 
Exchange Act Release No. 24934 (September 22, 1987), 52 FR 36122 
(September 25, 1987).
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    The Exchange also proposes to make an additional housekeeping 
change to CBOE Rule 8.15. Specifically, the Exchange proposes to 
eliminate the references to S&P 100 options and options on the DJIA 
from the rule so that the appropriate Market Performance Committee may 
appoint LMMs and SMMs in other options classes without having to file a 
rule change simply to identify the class. The Exchange proposes to 
revise paragraph (a) to permit the appropriate MPC to appoint as an LMM 
or SMM a market-maker in good standing with an appointment in an option 
class for which a DPM has not been appointed.\9\
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    \9\ Currently, all equity options classes and the NDX, MNX, QQQ 
and RUT options classes are DPM trading crowds.
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2. Statutory Basis
    By codifying the practice of the appropriate MPC appointing LMMs 
and SMMs to determine a formula for generating automatically updated 
market quotations during the trading day in their appointed options 
classes, thereby adding accountability for market quotations, the CBOE 
believes that the proposed rule change is consistent with and furthers 
the objectives of Section 6(b)(5) of the Act \10\ in that it is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.
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    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change, as 
amended, will impose a burden on competition that is not necessary or 
appropriate in furtherance of purposes of the Act.

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 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 CBOE consents, the Commission will:
    (A) by order approve such 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. 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. Copies of such 
filings will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No.

[[Page 6774]]

SR-CBOE-2001-63 and should be submitted by March 6, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3496 Filed 2-12-02; 8:45 am]
BILLING CODE 8010-01-P