[Federal Register Volume 67, Number 89 (Wednesday, May 8, 2002)]
[Notices]
[Pages 31002-31042]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11098]



[[Page 31001]]

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Part II





Securities and Exchange Commission





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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change 
and Amendment Nos. 1, 2, and 3 Thereto by the Chicago Board Options 
Exchange, Incorporated To Establish Rules for a Screen-Based Trading 
System Known as CBOEdirect; Notice

  Federal Register / Vol. 67 , No. 89 / Wednesday, May 8, 2002 / 
Notices  

[[Page 31002]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45829; File No. SR-CBOE-00-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the Chicago Board 
Options Exchange, Incorporated To Establish Rules for a Screen-Based 
Trading System Known as CBOEdirect

April 25, 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 November 9, 2000, 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 prepared by the 
Exchange. CBOE submitted Amendment Nos. 1, 2, and 3 to the proposal on 
October 29, 2001; April 2, 2002; and April 19, 2002, respectively.\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 letters from Angelo Evangelou, Legal Division, CBOE, to 
Nancy Sanow, Division of Market Regulation (``Division''), 
Commission, dated October 25, 2001 (``Amendment No. 1''); April 1, 
2002 (``Amendment No. 2''); and April 18, 2002 (``Amendment No. 
3''). In Amendment No. 1, CBOE substantially revised the proposed 
rule change; the proposed rule text and description of the proposal 
submitted as part of Amendment No. 1 supercedes those provisions of 
the original submission. In Amendment No. 2, CBOE substantially 
revised its proposed trade nullification rule for CBOEdirect. In 
Amendment No. 3, CBOE further modified the proposed trade 
nullification rule.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    CBOE proposes to adopt rules governing its screen-based trading 
system, known as CBOEdirect, which will initially be used to trade 
options only when the open outcry option market is not open. The text 
of the proposed rule change, as amended, is set forth below. All of the 
text below would be new CBOE rules; this proposal would not amend or 
delete any existing CBOE rule.
* * * * *

Chapter XL

Introduction

    The rules in Chapters XL (40) through XLIX (49) are applicable only 
to trading on the Exchange's screen based trading system. Trading of 
securities on the screen based trading system shall also be subject to 
the rules in Chapters I through XXVII to the same extent such rules 
apply to the trading of the products to which those rules apply, in 
some cases supplemented by the rules in Chapters 40 through 49, except 
for rules that have been replaced by rule in Chapters 40 through 49 and 
except where the context otherwise requires. Whenever a rule in 
Chapters 40 through 49 supplements or, for purposes of trading on the 
screen based trading system replaces such rules in Chapters I through 
XXVII, that fact is indicated following the rule in these Chapters 40 
through 49. Appendix A to the screen based trading rules lists the 
rules in Chapters I (1) through XXVII (27) that are applicable to the 
trading on the screen based trading system. Where appropriate, Appendix 
A also indicates that a rule in Chapter 1 through 27 has been 
supplemented by a rule in these screen based trading rules. All 
references in the rules in Chapters 1 through 27 to the Exchange shall 
mean SBT System also unless the context dictates otherwise.
* * * * *

Definitions

Rule 40.1
    (a) For purposes of the rules governing the use of the Exchange's 
Screen Based Trading System, any term defined in Article I of the 
Constitution or in Rule 1.1 and not otherwise defined in Chapters 40 
through 49 shall have the meaning assigned to such term in either 
Article I or in Rule 1.1.
SBT System
    (b) ``Screen Based Trading System'' or ``SBT System'' means the 
electronic system administered by the Exchange which performs the 
functions set out in Exchange rules including controlling, monitoring, 
and recording trading by members through SBT workstations and trading 
between members.
Application Program Interface
    (c) ``Application Program Interface'' or ``API'' means the computer 
program that allows Traders on their own computers or on CBOE or third-
party vendor-supplied workstations to interface with the SBT System.
SBT Book
    (d) ``SBT Book'' means all unexecuted orders, other than spread 
orders, currently held by the SBT System.
SBT Spread Book
    (e) ``SBT Spread Book'' means all unexecuted spread orders, 
currently held by the SBT System.
SBT Workstation
    (f) ``SBT workstation'' means a computer connected to the SBT 
System for the purposes of trading pursuant to the rules in these 
Chapters 40 through 49.
Trading Official
    (g) ``Trading Official'' means an Exchange employee or member who 
is granted certain duties under these Rules to take actions affecting 
either the operation of the SBT System or to take actions affecting the 
responsibilities of SBT Traders.
SBT Trader
    (h) ``SBT Trader'' means an individual member who or member 
organization which has the right to trade on the SBT System.
Market Turner
    (i) ``Market Turner'' means an SBT Trader who was the first to 
enter an order (quote) at a better price than the previous best book 
price and the order (quote) is continuously in the market until the 
particular order trades. There may be a Market Turner for each price at 
which a particular order trades.
Legal Width Market
    (j) ``Legal Width Market'' means a bid and offer for a prescribed 
size or greater that is at or within the prescribed width as set forth 
in Rule 44.4. While a legal width market is equivalent to the ``maximum 
quote width'' in width, Rule 44.4 requires that an SBT market-maker 
enter both the bid and offer to receive credit for the quote. A legal 
width market can be established by a bid and offer that are entered by 
two different SBT Traders.
Extended Trading Hour Session
    (k) ``Extended Trading Hour Session'' or ``ETH Session'' is any 
period of time during which the SBT System is open for trading other 
than the regular trading hour session for those products traded during 
the ETH session.
* * * * *

Application of Other Rules

Rule 40.2
    (a) To the extent the rules in Chapters I through XXXI are 
applicable to trading on the SBT System (as indicated by the context or 
by Appendix A to these Chapters XL through XLIX), the terms used in 
Chapters I through XXXI should

[[Page 31003]]

be read to have the following meanings where appropriate:
    (1) ``Floor'' should be read to mean SBT System.
    (2) ``Floor Official'' should be read to mean Trading Official.
    (3) ``Appropriate Floor Procedure Committee'' should be read to 
mean ``appropriate SBT Trading Committee.''
    (4) ``Floor Broker'' should be read to mean ``SBT Broker.''
    (5) ``Market-Maker'' should be read to mean ``SBT Market-Maker.''
    (6) ``DPM'' should be read to mean ``SBT DPM.''
    (b) References in rules to ``the Exchange'' should be read to 
include the SBT System where appropriate.
* * * * *

Chapter XLI

Market Participants, Market Access and Securities Dealt In

* * * * *
Market Participants
Rule 41.1
    (a) The SBT Traders in the SBT System shall be:
    (1) SBT Market-Makers--members who are either SBT Standard Market-
Makers, SBT Lead Market-Makers or SBT Designated Primary Market-Makers;
    (2) SBT Standard Market-Makers--members who have agreed to fulfill 
certain market making obligations thus qualifying for defined benefits;
    (3) SBT Lead Market-Makers--SBT Standard Market Makers who have a 
higher level of market-maker obligations and a greater level of 
benefits for those classes in which they act as SBT Lead Market-Makers. 
SBT Lead Market-Makers generally act in such capacity on a rotating 
basis;
    (4) SBT Designated Primary Market-Makers--members who are qualified 
and obligated to fulfill a higher level of market-maker obligations 
than SBT Standard Market-Makers thus qualifying for a greater level of 
defined benefits;
    (5) SBT Brokers--members who enter orders as agents for accounts 
other than accounts of SBT Market-Makers;
    (6) Proprietary Traders--members who enter orders as principal for 
non-market-maker proprietary accounts;
    (b) Other users of the SBT System are:
    (1) Clearing Firm Users--members who monitor and regulate the 
activities of traders trading through the clearing firm;
    (2) SBT System Operators/Administrators--Exchange employees who 
support the operation of the system.
* * * * *
Registration of Membership
Rule 41.2
    Any Exchange member who chooses to participate on the SBT System 
must apply with the Membership Committee to act as an SBT Market-Maker, 
SBT Broker, or Proprietary Trader. The Membership Committee shall be 
responsible for approving applications of Exchange members as an SBT 
Market-Maker, SBT Broker, or Proprietary Trader for the SBT System.
* * * * *
Communication Access
Rule 41.3
    The connection point for any SBT workstation must be in the United 
States except as otherwise provided for by the Board. The Exchange may 
limit the locations of any SBT workstations to specified locations or 
cities if necessary to ensure the operational integrity of the System.
* * * * *
Replacement Traders
Rule 41.4
    (a) If the SBT System is so enabled to recognize Replacement 
Traders, Individual SBT Market-Makers may nominate a Replacement Trader 
that must be qualified and registered with the Exchange as such. The 
Membership Committee shall be responsible for qualifying and approving 
Replacement Traders. Replacement Traders for a nominee of a member firm 
must be nominees of the same firm or must have their memberships 
registered for the same firm.
    (b) When an SBT Market-Maker logs off the SBT System, he may first 
choose to transfer his position to a Replacement Trader. Any quotes 
transferred in that manner will retain their priority.
* * * * *

Chapter XLII

Trading Day and States of Operation

* * * * *
Days and Hours of Business
Rule 42.1
    The days and hours of business shall be determined in accordance 
with the applicable rules for the type of product; e.g., equity 
options--Rule 6.1, index options--Rule 24.6, etc. The Board of 
Directors may determine to approve hours of trading and days of 
operation for categories of products traded on the SBT System that are 
different than those approved for trading on the Exchange's open outcry 
system on the Exchange floor.
* * * * *
States of Operation
Rule 42.2
    (a) Pre-Opening. Pre-opening is some pre-determined period of time 
(as described in Rule 42.3), as determined by the Exchange, prior to 
the opening during which the SBT System will accept orders and quotes, 
but during which no trading will take place.
    (b) Opening. During the Opening State, the System will accept 
orders and quotes for some period of time (as described in Rule 42.3) 
as determined by the Exchange. At the end of that period of time, 
quotes and orders will be accepted for some period of time (but will 
not be included in the opening trade). During this time, the length of 
which is determined by the Exchange, opening prices are established. At 
the end of the Opening State, the System will complete the opening 
trades, if any, and then change the state of the class to Trading.
    (c) Trading. During Trading, the series will trade freely and 
orders and quotes will be accepted.
    (d) Trading Halts. During Trading Halts as declared in accordance 
with Rule 43.4(b), orders are accepted by the System. The class will 
have to go through the pre-opening and opening procedures before it 
reverts to the state of Trading.
    (e) Closed. The System changes the state to Closed at a 
predetermined time dependent on the closing time of the underlying 
security. Trading is stopped but the System continues to accept certain 
types of orders to allow SBT Traders to maintain their orders. At some 
designated time the System stops accepting orders and performs end-of-
day procedures as described in Rule 42.4.
* * * * *
Opening and Closing Rotation Procedures
Rule 42.3
    (a) For some period of time before the opening (as determined by 
the Exchange) in the underlying security, the SBT System will accept 
orders and quotes. Spread orders and contingency orders (except 
``opening only'' orders) do not participate in the opening. The SBT 
System will disseminate information about resting orders in the SBT 
Book that remain from the prior business day and any orders sent in 
before the opening. After the primary market for the underlying 
security disseminates the opening trade or the

[[Page 31004]]

opening quote for the underlying security, the SBT System sends a 
notice to SBT Market-Makers with an appointment in that class of 
options who may then submit their opening quotes. If there is an SBT 
Designated Primary Market-Maker (``SBT DPM'') or an SBT Lead Market-
Maker (``SBT LMM'') in the particular option class, the SBT DPM or SBT 
LMM must enter opening quotes. Standard SBT Market-Makers may but are 
not required to enter an opening quote unless required by the procedure 
described in paragraph (b) below. The SBT System will begin the Opening 
Procedure at a randomly selected time within a number of seconds after 
the receipt of the underlying security's opening price. In the case of 
trading during an ETH session, the System may open the class without 
having received the underlying security's opening price. Spread orders 
and contingency orders do not participate in the opening trade or in 
the determination of the opening price.
    (b)(1) For series that have no SBT Market-Makers with appointments 
logged on to the System and no SBT Market-Makers without appointments 
providing pre-opening quotes, the System will issue an alert message to 
the Help Desk at a prescribed time before the open. The Help Desk may 
contact SBT Market-Makers with an appointment to request that the 
Market-Makers log on and prepare to quote any series in the class. If a 
sufficient number of SBT Market-Makers can not be encouraged to log on, 
then the Help Desk may have the Opening Notice sent to some or all 
other SBT Market-Makers logged on to the System. A Special Request for 
Quote, which may be sent to the SBT Market-Makers with an appointment, 
is an RFQ that will require a response.
    (2) For series where SBT Market-Makers have logged on but have not 
responded to the Opening Notice, and where no non-appointed SBT Market-
Makers have provided pre-opening quotes, the System will send an alert 
message to the Help Desk and a Special RFQ to those SBT Market-Makers 
with an appointment.
    (c) From some time after the Opening Notice is sent, the SBT System 
will calculate and provide the Expected Opening Price (``EOP'') given 
the current resting orders during an EOP Period. The EOP Period shall 
be a time established by the appropriate SBT Trading Committee and 
shall be no less than five seconds and no more than one minute. The EOP 
is that price at which the greatest number of orders in the SBT Book 
would be traded. The EOP will be re-calculated and disseminated every 
few seconds. During this time after the Opening Notice is sent, quotes 
and orders may be submitted without restriction. An EOP can only be 
calculated if an opening trade is possible. An opening trade is 
possible if: (i) the SBT Book is crossed (highest bid is higher than 
the lowest offer), locked (highest bid equals lowest offer), or there 
are market orders in the SBT Book, and (ii) at least one quote is 
present that is at or within the legal width market and of the 
prescribed minimum size as set forth in Rule 44.4.
    (d) After the EOP Period, the System will enter a Lock Interval 
during which quotes and orders may be submitted but they are not 
included in the opening trade. The Lock Interval shall be a period of 
time not to exceed four seconds. The SBT System will establish the 
opening price at this time during its Opening Procedure. The System 
will process the series of a class in a random order. The opening price 
of a series is the ``market-clearing'' price which will leave bids and 
offers which cannot trade with each other. In determining the priority 
of orders to be filled, the SBT System will give priority to market 
orders first, then to limit orders whose price is better than the 
opening price and entered before the Lock Interval, and then to resting 
orders at the opening price and entered before the Lock Interval. One 
or more series of a class may not open because of conditions cited in 
paragraph (f) of this Rule. Orders entered during the Lock Interval 
will be eligible to be traded (according to the time priority in which 
they were entered) after the System enters the Trading State.
    (e) As the opening price is determined by series, the System will 
change the product state of the series to Trading, and disseminate to 
OPRA and to the SBT participants the opening quote and the opening 
trade price, if any. Quotes and orders entered during the Lock Interval 
will then be submitted to the SBT Book in the order of their arrival.
    (f) The System will not open a series if one of the following 
conditions is met:
    (1) There is no quote from any SBT Market-Maker that provides a 
legal width market;
    (2) The opening price is not within an acceptable range (as 
determined by the appropriate SBT Trading Committee) compared to the 
highest quote offer and the lowest quote bid (e.g., the upper boundary 
of the acceptable range may be 125% of the highest quote offer and the 
lower boundary may be 75% of the lowest quote bid); or
    (3) The opening trade would leave a market order imbalance (i.e., 
there are more market orders to buy or to sell for the particular 
series than can be satisfied by the limit orders and the market orders 
on the opposite side).
    (g) If one of the conditions in paragraph (f) of this Rule is met, 
the System will not open the series but will send a Request for Quote 
(``RFQ'') with no size, except when the condition in (f)(3) is met. In 
this case, the RFQ will include a size equal to the market order 
imbalance and the direction (buy or sell) of the imbalance. At the end 
of the RFQ period, the System will put the series into Opening 
Rotation. The System will repeat this process until the series is open.
    (h) Two Trading Officials may deviate from the standard manner of 
the opening procedure, including delaying the opening in any option 
class, when they believe it is necessary in the interests of a fair and 
orderly market.
    (i) The procedure described in this Rule may be used to reopen a 
class after a trading halt.
    (j) Closing Rotation Procedure. The procedure described in this 
Rule may be employed after the end of the normal close of any trading 
session whenever the Exchange concludes that such action is appropriate 
in the interests of a fair and orderly market. The factors that may be 
considered in holding a closing rotation procedure include, but are not 
limited to, whether there has been a recent opening or reopening of 
trading in the underlying security, a declaration of a fast market, or 
a need for a closing procedure in connection with expiring individual 
stock options, an end of the year procedure, or the restart of a 
procedure which is already in progress. The decision to employ a 
closing rotation procedure in non-expiring options shall be 
disseminated prior to the commencement of such procedure.
* * * * *
End of Day/Session Process
Rule 42.4
    The System will automatically delete expiring orders (i.e., day 
orders and session orders) and expiring GTC (Good-'til-Canceled) orders 
after the close. If an option class is traded on both the SBT System 
during an Extended Trading Hours session and also on the Exchange 
during different trading hours then orders eligible to be traded in the 
next or a future session may be passed by the System from one book to 
the next appropriate book, e.g., orders may be passed from the SBT Book 
to the regular book or from the regular book to the SBT Book as 
appropriate.
* * * * *

[[Page 31005]]

Chapter XLIII

Trading Rules and Processing of Orders

* * * * *
Matching Algorithm/Priority
Rule 43.1
    (a) Generally. The appropriate SBT Trading Committee will determine 
to apply, for each class of options, one of the following rules of 
trading priority. The Exchange will issue a Regulatory Circular 
periodically which will specify which priority rules will govern which 
classes of options any time the appropriate Committee changes the 
priority.
    (1) Price-Time Priority. Under this method, resting orders in the 
book are prioritized according to price and time. If there are two or 
more orders at the best price then priority is afforded among these 
orders in the order in which they were received by the SBT System.
    (2) Combined Price-Time and Size Priority. Under this method, 
resting orders in the book are prioritized according to price. If there 
are two or more orders at the best price then trades are allocated 
proportionally according to size (in a pro rata fashion). The 
executable quantity is allocated to the nearest whole number, with 
fractions \1/2\ or greater rounded up and fractions less than \1/2\ 
rounded down. If there are two market participants that both are 
entitled to an additional \1/2\ contract and there is only one contract 
remaining to be distributed, the additional contract will be 
distributed to the market participant whose quote or order has time 
priority.
    (b) Additional Priority Overlays. In addition to the base 
allocation methodologies set forth above, the appropriate SBT Trading 
Committee may determine to apply, on a class-by-class basis, any or all 
of the following designated market participant overlay priorities in a 
sequence determined by the appropriate SBT Trading Committee. The 
Exchange will issue a Regulatory Circular periodically which will 
specify which classes of options are subject to these additional 
priorities as well as any time the appropriate SBT Trading Committee 
changes these priorities.
    (1) Public Customer. When this priority overlay is in effect and no 
other priority overlays are in effect, the highest bid and lowest offer 
shall have priority except that public customer orders shall have 
priority over non-public customer orders at the same price. If other 
priority overlays are also in effect, priority is established in the 
sequence designated by the appropriate SBT Trading Committee. In either 
case, if there are two or more public customer orders for the same 
options series at the same price, priority shall be afforded to such 
public customer orders in the sequence in which they are received by 
the System, even if the Combined Price-Time and Size Priority 
allocation method is the chosen allocation method.
    (2) Market Turner. When this priority overlay is in effect and no 
other priority overlays are in effect, the Market Turner has priority 
at the highest bid or lowest offer that he established. If other 
priority overlays are also in effect, priority is established in the 
sequence designated by the appropriate SBT Trading Committee. In either 
case, the Market Turner priority at a given price remains with the 
order once it is earned. For example, if the market moves in the same 
direction as the direction in which the order from the Market Turner 
moved the market, and then the market moves back to the Market Turner's 
original price, then the Market Turner retains priority at the original 
price.
    (3) Trade Participation Right. SBT Designated Primary Market-Makers 
or SBT Lead Market-Makers may be granted trade participation rights 
pursuant to the provisions of Chapter 44 that will provide for priority 
over non-public customer and/or customer orders up to the applicable 
participation right percentage designated pursuant to the provisions of 
Chapter 44. If other priority overlays are also in effect, priority is 
established in the sequence designated by the appropriate SBT Trading 
Committee. In allocating the participation right, all of the following 
shall apply:
    (i) To be entitled to their participation right, a DPM's/LMM's 
order and/or quote must be at the best price.
    (ii) A DPM/LMM may not be allocated a total quantity greater than 
the quantity that the DPM/LMM is quoting (including orders not part of 
quotes) at that price. Additionally, a DPM/LMM may not be allocated a 
total quantity that represents a greater percentage than the DPM's/
LMM's percentage of the total size at the best price before the 
participation right was applied.
    (iii) If the trade participation right priority and the Market 
Turner priority are both in effect and the DPM/LMM is the Market 
Turner, the Market Turner priority will not be applicable.
    (iv) In establishing the counterparties to a particular trade, the 
DPM's/LMM's participation right must first be counted against the 
DPM's/LMM's highest priority bids or offers.
    (c) Contingency Orders. Regardless of the allocation method in 
place, contingency orders are placed last in priority order, regardless 
of when they were entered into the SBT System. A contingency order that 
was entered before a limit order for the same series at the same price 
will be treated as if it were entered after the limit order. If 
customer priority is afforded to a particular option class, customer 
contingency orders will have priority over non-public customer 
contingency orders but behind all other orders.
    (d) Spread Orders. Spread orders will not be afforded priority 
according to this Rule 43.1 but will be handled as provided in Rule 
43.10.
    (e) Regenerated Quotes. Notwithstanding anything to the contrary in 
this Rule, if a Market-Maker has the SBT System regenerate his quote in 
accordance with Rule 44.5(b) after the Market-Maker's bid or offer has 
been filled, then that portion of the regenerated quote equal to the 
original size executed against that Market-Maker's bid or offer takes 
priority over all other orders at the regenerated price except public 
customer orders, if public customer priority is applicable to that 
class of options. The portion of the regenerated quote that is not 
executed will be placed in a priority position consistent with the time 
the quote was regenerated.
    (f) Cancel/Replace Orders. Depending on how a quote or order is 
modified the quote or order may change priority position as follows:
    (1) If the price is changed, the changed side loses position and is 
placed in a priority position behind all orders of the same type (i.e., 
customer or non-customer) at the same price.
    (2) If one side's quantity is changed, the unchanged side retains 
its priority position.
    (3) If the quantity of one side is decreased, that side retains its 
priority position.
    (4) If the quantity of one side is increased, that side loses its 
priority position and is placed behind all orders of the same type at 
the same price.
    (g) Priority of Market Orders and Limit Orders. As further 
described in the Rules governing the execution of market orders and 
limit orders, market orders generally have execution priority over 
limit orders. However, if there is not a legal width market available 
when a market order is entered, an RFQ will be sent for the market 
order. During the pendency of the RFQ process, a limit order may be 
executed ahead of the market order if an order is entered on the other 
side of the market which satisfies the order's limit before any of

[[Page 31006]]

the conditions are satisfied that would allow the market order to 
trade.
* * * * *
Types of Orders Handled
Rule 43.2
    (a) At the discretion of the appropriate SBT Trading Committee, and 
once the System is so enabled, any of the following types of orders may 
be accommodated on the SBT System:
    (1) Market Order. A market order is an order to buy or sell a 
stated number of option contracts at the best price available in the 
market.
    (2) Limit order. A limit order is an order to buy or sell a stated 
number of option contracts at a specified price, or better.
    (3) Cancel order. A cancel order is an order that cancels partially 
or fully an existing buy or sell order.
    (4) Cancel Replace Order. A cancel replace order is an order to 
cancel fully an existing buy or sell order and replace it with a new 
order that has a different quantity or a different price.
    (5) Day order. A day order is an order that remains in the SBT Book 
until it either trades or expires at the end of the day it was entered. 
The System may recognize different types of day orders as indicated in 
Rule 43.3.
    (6) Good-for-Session order. A Good-for-Session order remains in 
either the SBT Book or the auction market book until it either trades 
or expires at the end of the SBT Trading session or the auction market 
session, as appropriate. (See interpretations to Rule 43.3).
    (7) Good-'til-Canceled order. A Good-'til-Canceled order remains in 
the SBT Book until either it trades, is withdrawn by the submitting 
trader or his firm, or the option expires. The System may recognize 
different types of Good-'til-Canceled orders as indicated in Rule 43.3.
    (8) Spread order. A spread order is an order accommodated by the 
SBT System and as defined in the rule governing the execution of spread 
orders.
    (9) Contingency order. A contingency order is a limit or market 
order to buy or sell that is contingent upon a condition being 
satisfied while the order is held in the Book for execution.
    (A) Opening Only. An Opening Only order may be a market order or a 
limit order that may be accepted when the System is in the Pre-Opening, 
Trading Halt, and Closed States. An opening only order either will be 
executed on the opening or canceled.
    (B) All or None. An all or none order is an order which is to be 
executed in its entirety at its limit price.
    (C) Fill-or-Kill Order. A fill-or-kill order is an order which is 
to be executed in its entirety within a short period of time after its 
receipt. If the order is not so executed, it is canceled.
    (D) Immediate-or-Cancel Order. An immediate-or-cancel order is a 
market or limit order which is to be executed in whole or in part 
within a short period of time after it is received by the SBT System. 
Any portion not so executed is to be treated as canceled.
    (E) Minimum Volume Order. A minimum volume order is an order where 
the fill should at least equal the minimum volume specified, which is 
an amount less than the total volume of the order.
    (F) Stop (stop-loss) Order. A stop order is an order to buy or sell 
when the market for a particular option contract reaches a specified 
price. A stop order to buy becomes a market order when the option 
contract trades or is bid at or above the stop price. A stop order to 
sell becomes a market order when the option contract trades or is 
offered at or below the stop price.
    (G) Stop-limit Order. A stop-limit order is an order to buy or sell 
when the market for a particular option contract reaches a specified 
price. A stop-limit order to buy becomes a limit order when the option 
contract trades or is bid at or above the stop-limit price. A stop-
limit order to sell becomes a limit order when the option contract 
trades or is offered at or below the stop-limit price.
    (H) Market-on-close Order. A market-on-close order is a market or 
limit order that is to be executed during some defined period of time 
prior to the close and should be filled at or near to the Closing price 
for the particular series of option.
    (10) Any other order type that the Exchange decides to permit to be 
entered on the SBT System.
    (b) The appropriate SBT Trading Committee may determine to provide 
for only certain of these order types to be available during an 
extended trading hour session, even if these order types are available 
during regular trading hours. For example, the appropriate SBT Trading 
Committee may determine not to allow for the entry of market orders 
during an extended trading hour session.
* * * * *
Order Types Accepted at Various Product States
Rule 43.3
    (a) The appropriate SBT Trading Committee shall determine which 
order types may be accepted at various product states and session 
states.
    (b) Once the System is enabled to receive such categories of day 
and good 'til canceled (``GTC'') orders, customers may specify that 
their day orders or GTC orders are to be transferred between one 
trading session and the next and may determine to have the orders 
represented only during ETH sessions or only during auction market 
sessions or both. The customer may specify his preferences for the 
representation of his order by using codes published by the Exchange 
for that purpose.
    * * * Interpretations and Policies:
    .01  The Exchange will provide for the following ``time in force'' 
codes for orders entered over the Exchange's interface: (1) DAA--this 
indicates the order is to be represented only in the AM ETH session; 
(2) DAY--this indicates the order is to be represented only during the 
current Regular Trading Hour (``RTH'') session; and (3) GTC--this 
indicates the order is to be represented in all RTH sessions until it 
is traded, canceled or expired.
    .02  Once the System is so enabled to recognize such codes, the 
Exchange will provide for the following for orders entered over the 
Exchange's interface: (1) DAP--this indicates the order is to be 
represented only in the PM ETH session; (2) DAX--this indicates the 
order is to be represented during all sessions during the current 
trading day; and (3) GTX--this indicates the order is to be represented 
during all sessions until it is traded, canceled, or expired.
* * * * *
Unusual Market Conditions
Rule 43.4
    (a) Fast Markets. A fast market may be declared by (A) the SBT 
System automatically or (B) by two Trading Officials whenever in the 
judgment of those Trading Officials, due to an influx of orders or 
other conditions or circumstances, the interest of maintaining a fair 
and orderly market so requires. A ``fast market'' may be declared in 
one or more option classes or for the SBT System in its entirety. Once 
a fast market has been declared either by the SBT System or by Trading 
Officials, a systemwide notification message will be sent. When Trading 
Officials declares a fast market or when the SBT System declares a fast 
market, two Trading Officials may take any action the Trading Officials 
deem necessary to maintain a fair and orderly market including changing 
the bid-ask width requirement as set forth in Rule 44.4.
    (1) SBT System Declaration. The SBT System may declare a fast 
market for a class or classes when the System has lost an underlying 
security feed, e.g., SIAC or Nasdaq feed. Regular trading

[[Page 31007]]

conditions may be resumed when the underlying security feed has been 
restored or whenever a Trading Official believes that such action is 
warranted.
    (2) Trading Official Declaration. In declaring a fast market, among 
the conditions which the Trading Officials may consider are loss of an 
underlying security feed, impending news, increases in trading volume 
that has the capability to interfere with the operation of the System, 
increase in volatility that has the capability to interfere with the 
operation of the System, and for any other reason to maintain a fair 
and orderly market. Regular trading conditions may be resumed whenever 
two Trading Officials believe that such action is warranted.
    (b) Trading Halts. A trading halt may be declared (A) automatically 
by the SBT System or (B) by two Trading Officials whenever the 
conditions, in the Trading Officials' judgment, can not be managed by 
means available through the operation of paragraph (a) of this Rule.
    (1) SBT System Declaration. With respect to stock options, the SBT 
System may declare a trading halt, when a trading halt has been 
declared for the underlying security in the primary market. When the 
SBT System is operated during Extended Trading Hours, there may not be 
a primary market trading the underlying security. In such cases, the 
SBT System may or may not declare a trading halt if the underlying 
security has been halted on one or more of the markets trading the 
underlying security. The appropriate SBT Trading Committee will 
determine in advance from time to time whether to have the system 
automatically halt trading on the options if the trading in the 
underlying has been halted in a market trading the underlying during an 
ETH session.
    (2) Trading Official Declaration.
    (A) With respect to options on equity securities, two Trading 
Officials may declare a trading halt for any of the following reasons:
    (i) There was no last sale and/or quotation dissemination by the 
Exchange or by OPRA;
    (ii) The primary market halts trading in one or more stocks for 
regulatory reasons;
    (iii) The primary market halts trading in one or more stocks for 
non-regulatory reasons;
    (iv) The primary market halts trading floor-wide;
    (v) The primary market is open but is unable to disseminate last 
sale or quotation information;
    (vi) Dissemination of news after or near to the close of trading in 
the primary market;
    (vii) Opening of the underlying security has been delayed because 
of unusual circumstances;
    (viii) Loss of the underlying security feed, e.g., SIAC or NASDAQ 
feed;
    (ix) SBT System or CBOE systems failure;
    (x) Opening has not been completed or other factors affect the 
status of the opening;
    (xi) Other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
    (B) With respect to index options, two Trading Officials may 
declare a trading halt for any of the following reasons:
    (i) Activation of price limits on future exchanges;
    (ii) One or some of the stocks underlying the index is/are not 
trading;
    (iii) The current calculation of the index derived from the current 
market prices of the stocks is not available;
    (iv) The opening has not been completed or other factors affect the 
status of the opening;
    (v) Other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
    (C) With respect to any class of products not specified above, two 
Trading Officials may declare a trading halt for any unusual conditions 
or circumstances that the Trading Officials deem to be detrimental to 
the maintenance of a fair and orderly market.
    (3) Resumption of Trading. Whenever trading has been halted, 
whether by the system or by the action of Trading Officials, trading 
may be resumed whenever two Trading Officials determine that a fair and 
orderly market may be maintained.
* * * * *
Trade Nullification Procedures
Rule 43.5
    (a) Negotiated Trade Nullification. A trade on the SBT System may 
be nullified if the parties to the trade agree to the nullification. 
Negotiation may be conducted through the SBT System's messaging 
facility that would allow a trade party to exchange messages with his 
contra-parties in a particular trade. The SBT System will preserve the 
anonymity of the parties although a party may voluntarily disclose his 
identity to the other parties. When all parties to a trade have agreed 
to a trade nullification, one party must contact the Help Desk which 
will confirm the agreement and perform the following procedure:
    (1) Nullify the trade in the matched trade system;
    (2) notify all parties involved;
    (3) disseminate cancellation information in prescribed OPRA format; 
and
    (4) reestablish order(s) and their respective priorities in the SBT 
Book on a best efforts basis.
    (b) Mandated Trade Nullification. An SBT Trader may have a trade 
nullified by two Trading Officials if: (i) a documented request is made 
within five minutes of execution or, if the request is on behalf of a 
public customer order, within fifteen minutes of execution; and (ii) 
the trade resulted from: (A) a disruption or malfunction of an Exchange 
execution, dissemination, or communication system; (B) an erroneous 
print disseminated by the underlying market which is later cancelled or 
corrected by that underlying market; or (C) an erroneous quote in the 
Primary Market (as defined in Rule 1.1) for the underlying security as 
defined below.
    For purposes of this Rule, an erroneous quote in the Primary Market 
for an underlying security is a quote that 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 during the time period 
encompassing two minutes before and after the dissemination of such 
quote. The average quote width shall be determined by adding the quote 
widths of each separate quote during the four minute time period 
referenced above (excluding the quote in question) and dividing by the 
number of quotes during such time period (excluding the quote in 
question).
    Upon the nullification of a trade, the Help Desk will perform the 
following procedure:
    (1) Notify all parties involved;
    (2) disseminate cancellation information in prescribed OPRA format; 
and
    (3) reestablish order(s) and their respective priorities in the SBT 
Book on a best efforts basis.
    Nothing in this Rule should be construed to prohibit the contra-
party of the trade (i.e., that party who traded against the party that 
initiated the nullification) to seek to recover any loss incurred due 
to a change in the price in the underlying during the period from the 
trade to a reasonable amount of time (for unwinding the transaction) 
after the nullification notification. The recovery of any loss may be 
sought by any legal means including arbitration.

[[Page 31008]]

    (c) Reinstatement of Orders in a Nullified Trade. All orders that 
were executed in a nullified trade will be reinstated along with their 
original entry time and price except for the following:
    (1) An order of a party requesting a nullification;
    (2) a market order;
    (3) an order that was originally one side of a quote;
    (4) a contingency order; and
    (5) an order of a party who does not want the order to be 
reinstated.
    A reinstated order is treated like any incoming order except it 
retains its original order entry time. If the reinstated order is the 
first in time priority, the order will receive market turner priority. 
If there is a market turner order at the same price level with lower 
time priority, that other order loses its market turner priority.
    (d) Spread Orders. If so enabled, the System will provide for the 
possibility of nullifying trades of spread orders.
* * * * *
Order Entry and Maintenance
Rule 43.6
    (a) Spread Order Entry. Once the SBT System is so enabled, Traders 
will have the ability to enter spread orders whose legs are options of 
the same underlying security.
    (b) Order Maintenance. A Trader may display the status of his 
working or active orders (submitted to the SBT Book and SBT Spread 
Book, if applicable). A Trader may keep orders in the System that are 
inactive and may activate them when desired. A Trader may update 
(cancel/replace) the order; cancel the order or a group of orders; or 
activate or inactivate an order or a group of orders. When a Trader 
logs off the SBT System his orders will remain on the SBT Book or SBT 
Spread Book, if applicable.
    (c) Limitations on Orders. Order providers (SBT Brokers and 
Proprietary Traders) will be prohibited from entering limit orders in 
the same options series, for the accounts or accounts of the same or 
related beneficial owners, in such a manner that the Order Provider or 
the beneficial owner(s) effectively is operating as a Market-Maker by 
holding itself out as willing to buy and sell options contracts on a 
regular or continuous basis. In determining whether an Order Provider 
or beneficial owner effectively is operating as a Market-Maker, the 
Exchange will consider, among other things: the simultaneous or near-
simultaneous entry of limit orders to buy and sell the same option 
series during the same day; the multiple acquisition and liquidation of 
positions in the same option series during the same day; and the entry 
of multiple limit orders at different prices in the same options 
series.
* * * * *
Market Order Processing
Rule 43.7
    (a)(1) If a legal width market exists for a particular option, even 
if established by a pair of unrelated bids and offers for a size less 
than required of SBT Market-Makers to meet their quote requirement, the 
SBT System will match market orders against orders at the best price in 
the Book and against the other orders behind the best price at varying 
prices until the order is fully executed or until a legal width market 
no longer exists.
    (2) If there is not a legal width market when the order is entered 
in the System or if any portion of the market order is not executed 
because there is no longer a legal width market, then the System will 
hold the order (or any remaining portion of the order) in queue, send a 
Request for Quote (``RFQ'') to SBT Market-Makers currently providing 
quotes in the class (which will be handled as described in paragraph 
(a)(3) below), and send a notice to the originator of the order about 
the order status.
    (3) An RFQ sent pursuant to paragraph (a)(2) will include the 
market order quantity, but not whether the order is a buy or a sell. 
RFQ responses will be sent to the SBT Book. Once the responses are sent 
to the SBT Book the orders may trade with resting orders unless the 
market order trades against that order first when one of the below 
conditions are met. The market order will be executed if any one of the 
following conditions becomes true:
    (A) During the RFQ expiration response time, if the best quote 
width (i.e., the spread between the best bid and offer) becomes a 
certain prescribed percentage (e.g., 75%)--as set by the appropriate 
SBT Trading Committee--of the legal width market, the System will 
execute the market order against the quote and any other eligible 
booked order (i.e., an order on the book with a limit price that allows 
that order to trade against the market order) until the order is filled 
or the legal width market no longer exists. If there is volume 
remaining in the market order, the System will hold the market order in 
queue again, send another RFQ, and send a notice to the originator 
about the order status.
    (B)(i) If the System receives a limit order on the same side of the 
market as the market order that could match the best bid or offer and 
at least one legal width quote has been received, then the System will 
execute the market order against the best bid/offer. If there is no 
legal width quote then the limit order that is entered is filled ahead 
of the market order.
    (ii) If one or more incoming RFQ responses could execute against a 
market order as well as any limit orders that are already on the book 
(``older limit orders'') at a particular price, then:
    (aa) If the incoming RFQ response(s) is (are) of large enough 
quantity to fill all the older limit orders and the market order, then 
all those orders will be filled at the price of the older limit orders.
    (bb) If the incoming RFQ response(s) is (are) not large enough to 
fill the market order and all the older limit orders, the market order 
will be executed at the minimum price interval (i.e., the minimum price 
differential which may exist between two orders) ahead of the older 
limit orders.
    (C) When a certain prescribed percentage of the market-makers 
currently providing quotes in the class (the percentage to be set by 
the appropriate SBT Trading Committee) (e.g., 50%) have responded to 
the RFQ with legal width markets or when the RFQ period expires and 
there is at least one quote response, the System will execute the 
market order against orders in the SBT Book. A response will count 
toward the percentage requirement even if the quotes are traded against 
orders in the book before all orders that constitute the percentage 
requirement have been received. If there is volume remaining in the 
market order, the System will hold the order in queue and repeat the 
RFQ cycle again. The System will also send a notice to the originator 
of the order status and give him the option to cancel the order.
    (4) When a market order can be executed under the conditions cited 
in sub-paragraphs (3)(A) through (C) above and there is one or more 
market orders on the opposite side, the System will cross the market 
orders at a price as determined as follows:
    (A) At the middle of the best bid-offer in the Book if the middle 
price is a legal price; or
    (B) If the middle price is not a legal price, at the next legal 
price from the middle that is closer to the last trade price of the 
series.
    (C) For purposes of this sub-paragraph (a)(4), ``legal price'' 
means a price that may be entered on the SBT System.
    (b) If the RFQ period expires and there is no RFQ response, the 
System will continue to hold the market order, repeat the RFQ cycle, 
send a notice to the originator of the order, and send an

[[Page 31009]]

alert message to the Help Desk so that the Help Desk may solicit quotes 
from the market-makers. The Help Desk may require a response from the 
Market-Makers.
    (c) If a market order for a certain series becomes subject to an 
RFQ as described in paragraph (a) above, then subsequent market orders 
for the same series and side are queued to ensure that these incoming 
market orders are processed in time sequence. Market orders for the 
same series but opposite side would be processed normally. Other orders 
that are not market orders would be routed to the SBT Book.
    (d) Trading Halts. When trading is halted in the series while a 
market order is on hold waiting for RFQ responses, the SBT System will 
do the following: If the market order is a GTC order, the System will 
hold and execute it at the next opening, in the same day or the next 
day. If it is a day order, the System executes it at re-opening if 
trading resumes for the same day. If trading does not resume, the 
System purges it as part of the end-of-day procedure for purging day 
orders.
* * * * *
Processing of Limit Orders
Rule 43.8
    Until the System is enabled to provide price protection as set 
forth in Rule 43.8A, after the opening, upon being entered into the SBT 
System, limit orders will be matched against the best prices available 
in the SBT Book under the priority rules set forth in Rule 43.1. If 
there are no orders in the SBT Book that match the limit order when it 
is entered, the limit order will be held and displayed in the SBT Book 
and may be traded against later submitted orders.
* * * * *
Price Protection of Limit Orders
Rule 43.8A
    (a) When the System is so enabled, and to the extent that the 
appropriate SBT Trading Committee has determined to apply the 
protection to the particular options class, the System will protect a 
limit order by automatically executing it against the best bid/ask only 
if one or both of the following conditions is met:
    (1) A legal width market exists for that series; or
    (2) The limit price on the order is between the bid of the series 
with the same expiration month and one strike price lower and the offer 
of the series with the same expiration month and one strike price 
higher and a legal width market exists for both of these series.
    (b) If a limit order can execute against the best bid/ask and 
neither of the conditions set forth in paragraph (a)(1) or (a)(2) is 
met, the System puts the order in queue and sends an RFQ. The RFQ will 
include the order quantity but not whether the order is a buy or sell. 
Quote responses are exposed in the SBT Book as they are received. The 
SBT Trader whose link to the SBT System is through the API and who has 
submitted the limit order may override the RFQ and determine to enter 
the limit order into the SBT Book.
    (c) If the limit order's price prevents it from matching with the 
best bid/ask, the System will place the order in the Book in its 
appropriate priority position.
    (d) If the submitting SBT Trader does not override the RFQ pursuant 
to paragraph (b), the System will execute the limit order after one of 
the following conditions becomes true:
    (1) During the RFQ response time, if the best quote width becomes a 
certain prescribed percentage (e.g., 75%)--as set by the appropriate 
SBT Trading Committee--of a legal width market, the System shall 
execute the limit order against the quote and any other eligible Booked 
order. If there is volume remaining in the limit order, the System will 
hold the limit order in the SBT Book and send a notice to the 
originator about the order status.
    (2) If an incoming market or limit order is received (independent 
of the RFQ responses) on the opposite side that would match the 
original limit order and if a legal width market exists for the series, 
then the System will match the limit order with the best bid/ask. If 
there is volume remaining in the limit order, the System will hold the 
limit order in the SBT Book.
    (3) When a certain prescribed percentage of the SBT Market-Makers 
currently providing quotes in that class (the percentage to be set by 
the appropriate SBT Trading Committee), have responded to the RFQ or 
when the RFQ period expires and there is at least one quote response, 
the System will execute the limit order against the SBT Book. If there 
is volume remaining in the limit order, the System will hold it in the 
SBT Book. The System will also send a notice to the originator of the 
order status and give him the option to cancel the order.
    (e) If a limit order for a certain series is queued, subsequent 
limit orders for the same series and side are queued behind the first 
one to ensure that they are processed in time sequence. Market orders 
for the same series and side also will be queued. If a legal width 
market remains upon completion of the limit order processing the market 
order will be executed against orders resting in the Book. If there is 
not a legal width market, market order processing will begin in 
accordance with Rule 43.7.
* * * * *
Processing of Contingency Orders
Rule 43.9
    Contingency orders will be handled by the SBT System as described 
below. As described in Rule 43.2, for purposes of determining priority, 
a contingency order that is entered before a limit order with no 
contingency at the same price and for the same series will nonetheless 
be treated as if it were entered after the limit order. The SBT System 
will notify the originator of the order if the contingency order 
expires or is canceled. Contingency orders except Immediate or Cancel 
orders will not be disseminated as part of the best bid/ask to OPRA. 
The SBT System may disseminate to certain SBT Traders a contingency 
count that includes All or None, Fill or Kill, and Minimum Volume order 
information. The following contingency orders will be handled by the 
SBT System as described below once the SBT System is so enabled to 
handle such contingency orders.
    (a) Opening Only Order. The order will be executed during the 
Opening State if there are orders to execute it against. The order or 
any unexecuted portion will expire after the opening trade or after the 
opening quote is disseminated.
    (b) All or None Order. An all or none (``AON'') order will only be 
executed if it can be executed in its entirety. The order will remain 
in the Book until filled or canceled.
    (c) Fill or Kill Order. A fill or kill (``FOK'') order has a time 
contingency and must be fully filled within a period of time, or the 
System automatically cancels the order. The SBT System will attempt to 
execute the full quantity of the FOK order upon receipt. If the FOK 
order is at the best price, and there is a legal width market, and it 
cannot be filled fully, the System will indicate its presence to 
certain SBT Traders by disseminating its quantity for the Time 
Contingency Period (e.g., five seconds) as determined by the 
appropriate SBT Trading Committee. If the FOK order does not equal or 
better the market, e.g., if it is a buy order lower than the best bid 
or a sell order higher than the best offer, the System will reject the 
order.
    (d) Immediate or Cancel Order. An Immediate or Cancel (``IOC'') 
order has a time contingency and must be filled fully or partially 
within a period of time, or the System automatically cancels the 
remainder. If the IOC order is at the best price, and there is a legal

[[Page 31010]]

width market, and it cannot be filled fully, the System will indicate 
its presence to certain SBT Traders by disseminating its quantity for 
the Time Contingency Period as determined by the appropriate SBT 
Trading Committee. If the IOC order does not equal or better the 
market, e.g., if it is a buy order lower than the best bid or a sell 
order higher than the best offer, the System will reject the order. The 
SBT System will cancel the residual order volume after the Time 
Contingency Period, if the IOC order has not been executed completely.
    (e) Minimum Volume Order. A Minimum Volume (``MIN'') order may be 
accepted by the SBT System at any time. The MIN order has two 
quantities specified: the total quantity and the minimum acceptable 
quantity that can be filled. The fill must be at least equal to the 
minimum quantity specified. The SBT System will attempt to execute at 
least the minimum volume specified against orders in the Book. If the 
minimum volume is not executed, the order will remain in the Book.
    (f) Stop Order. A Stop order to buy becomes a market order when the 
product trades or is bid at or above the stop price. A Stop order to 
sell becomes a market order when the product trades or is offered at or 
below the stop price.
    (g) Stop Limit Order. A Stop Limit order has two prices, the stop-
limit price and the limit price. A stop-limit order to buy becomes a 
limit order at the second price when the product trades or is bid at or 
above the stop-limit price (first price). A stop-limit order to sell 
becomes a limit order at the second price when the product trades or is 
offered at or below the stop-limit price (first price).
    (h) Market On Close Order. A Market on Close (``MOC'') order may be 
received at any time up to some period of time before the closing 
period (e.g., four minutes before the close) and is executable only 
during a pre-defined period of time prior to the close (e.g., two 
minutes prior to the close). When an MOC order is present, the System 
will send an RFQ for it at a pre-defined time before the close; the 
time before the close to be determined by the appropriate SBT Trading 
Committee. The order is canceled after closing if it is not filled.
* * * * *
Processing of Spread Orders
Rule 43.10
    (a) When the System is so enabled, the System will support the 
following types of spread orders (``Spread Orders''): (1) two-legged 
spreads where the ratio is 1:1 and 1:2; (2) three-legged spreads where 
the ratio is 1:1:1 or 1:2:1; (3) four-legged spreads where the ratio is 
1:1:1:1; and (4) any spread type approved by the appropriate SBT 
Trading Committee.
    (b) The System will treat each spread order as a unique product and 
will assign each a unique product name. Data about the resulting spread 
product will be disseminated at the point of creation to all SBT 
Traders. The System will maintain a Book for every unique spread, with 
bids and offers for individual spread packages. The System will keep 
track of and disseminate the best bid and offer for every unique 
spread.
    (c) An SBT Trader submitting a spread order may change the net 
price, the multiplier or the quantity of the spread, the time in force, 
and any contingency.
    (1) An increase in the multiplier or quantity changes the order's 
priority;
    (2) A decrease in the multiplier or quantity does not change its 
priority position;
    (d) A spread order may trade only if all of its legs have legal 
width markets and if only one leg trades at a price ahead of orders in 
the Book at the same price.
    (e) When the spread is traded, the System will do the following:
    (1) Disseminate to the order source the fill report for the spread, 
but not the individual legs;
    (2) Disseminate to the designated back office the fill reports for 
the individual legs; and
    (3) Disseminate the last sale reports to OPRA (or any other 
securities information processor that is being employed by the 
Exchange) for the individual legs, with some indication that the last 
sale is part of a spread trade.
* * * * *
Processing of Requests for Quotes
Rule 43.11
    (a) Submission of RFQs.
    (1) Any SBT Trader may initiate a Request for Quote (RFQ) for a 
series. The SBT Trader may specify a size at his option. The System 
will send the RFQ to the Market Makers who are currently providing 
quotes in that class.
    (2) The SBT System will also automatically send an RFQ when the SBT 
System receives a market order and the current market width is wider 
than the Exchange prescribed width as set forth in Rule 44.4.
    (b) Response to RFQs. RFQs may be submitted by an SBT Trader or an 
RFQ may be initiated by the System as otherwise described in the Rules. 
In either event, the RFQ has an expiration period for the Market-Makers 
to respond to the RFQ. Market-Makers must respond to RFQs in accordance 
with their obligations set forth in Rule 44.4(b).
    (c) Processing of RFQ Responses. RFQ responses (quotes) are 
submitted to the Book and exposed as they arrive.
* * * * *
Crossing Trades
Rule 43.12
    (a) Crossing Mechanism. Once the System is so enabled to provide 
for it, the Crossing Mechanism is a process by which an SBT Broker can 
facilitate orders or cross two orders.
    (1) An SBT Broker must submit to the System an RFQ designating a 
size equal to the quantity to be crossed.
    (2) SBT Traders will have an RFQ response period for a length of 
time established by the SBT Trading Committee in order to enter orders 
or quotes that improve upon the market.
    (3) Within a time period after the RFQ was sent, with such time 
period to be established by the SBT Trading Committee, the terms of the 
cross transaction have to be entered. The required terms include the 
terms of the original order and the proposed facilitation order (or two 
original orders), a proposed crossing price, the quantity of the 
original order which the SBT Broker is willing to facilitate (in the 
case of a facilitation cross), and an indication of which order is to 
be exposed to the market (in the case of cross of two original orders). 
The customer order will be the exposed order in a facilitation cross.
    (4) The following two conditions must be satisfied at the time the 
cross transaction is entered or the System will reject the cross 
transaction: (A) a legal width market must exist for the particular 
series to be crossed and (B) the proposed cross price must be between 
the best bid and offer displayed by the System.
    (5) After accepting the cross transaction, the System will 
immediately cross the two orders for the guaranteed crossing percentage 
(which is established at 40%) of the overall crossing quantity. The 
System exposes the remaining volume of the designated order in the book 
for a crossing period of twenty seconds. The order's price and the 
remaining quantity are disclosed but there is no indication that the 
order is part of an impending cross. The System places the opposite 
order on hold as a shadow order that is not visible except to the 
submitter.

[[Page 31011]]

    (6) As long as the exposed order is the highest priority order at 
the best price, other SBT Traders can trade against the exposed order 
during the crossing period. If the exposed order is fully filled by 
other traders, the System cancels the remaining quantity of the shadow 
order and sends the SBT Broker a message that the crossing transaction 
is completed.
    (7) At the end of the crossing period (if the order has not yet 
been fully traded), if the exposed order is at the best price and has 
the highest priority, then the System fills the remainder of the order 
against the shadow order. The System cancels the remainder of the 
shadow order and sends the crossing firm a message that the crossing 
transaction is completed. If the exposed order has quantity remaining 
and it is not the highest priority order at the market, then the System 
automatically cancels the remainder of the exposed order and the shadow 
order and sends the SBT Broker a message that the crossing transaction 
is completed.
    (b) Rule 43.12A will apply until the System is so enabled to 
provide for this Crossing Mechanism.
* * * * *
Interim Crossing Procedure
Rule 43.12A
    (a) An SBT Broker who wishes to cross two original orders or to 
facilitate an original order must first send an RFQ with the size of 
the orders to be crossed. The RFQ response period will be established 
by the appropriate SBT Trading Committee and shall initially be set at 
thirty seconds.
    (b) At the end of this RFQ response period and within twenty 
seconds or some other period of time established by the appropriate SBT 
Trading Committee, the SBT Broker must expose one of the orders to the 
Book.
    (c) If the exposed order has not been completely taken out by other 
SBT Traders at the end of a period after the order was entered, then 
the SBT Broker may enter the opposite order to cross the balance of the 
exposed order. The period of time shall be established by the 
appropriate SBT Trading Committee and shall initially be set at ten 
seconds.
* * * * *
Prohibited Conduct Related to Cross Transactions
Rule 43.12B
    (a) It will be a violation of Rule 43.12 and of Rule 43.12A for an 
SBT Broker to be a party to any arrangement designed to circumvent Rule 
43.12 or Rule 43.12A by providing an opportunity for a customer to 
regularly execute against agency orders handled by the SBT Broker 
immediately upon their entry into the System.
    (b) It will be a violation of Rule 43.12 or of Rule 43.12A for an 
SBT Broker to cause the execution of an order it represents as agent on 
the Exchange by orders it solicited from Members and non-member broker-
dealers to transact with such orders, whether such solicited orders are 
entered into the System directly by the SBT Broker or by the solicited 
party (either directly or through another Member), if the Member fails 
to expose orders on the Exchange as required by Rule 43.12 or Rule 
43.12A.
* * * * *
Responsible Traders
Rule 43.13
    (a) Defined. A Responsible Trader is an individual who is 
responsible for each and every order submitted to the SBT System on 
behalf of a particular SBT Trader. There must be a Responsible Trader 
registered with the Exchange for every member. The Responsible Trader 
must be approved by the Membership Committee and must satisfy any 
qualification standards set by the Exchange.
    (b) The Responsible Trader will be required to:
    (1) have full control over access to the SBT System and over the 
ability to submit orders using the member's access right;
    (2) be fully aware of orders submitted using the member's access 
right (although the business might have originated from another 
source); and
    (3) have the ability to adjust or withdraw any order.
    (c) A Responsible Trader can be charged for violations of Exchange 
rules resulting from any submission of an order made on behalf of the 
particular member.
* * * * *

Chapter XLIV--SBT Market-Makers and Designated Market-Makers

* * * * *

Section A: Market-Makers

* * * * *
SBT Market-Maker Defined
Rule 44.1
    An SBT Market-Maker for purposes of the rules in Chapter XL through 
LIX is an individual (either a member or nominee of a member 
organization or a member who has registered his or her membership for a 
member organization) who is registered with the Exchange for the 
purpose of making transactions as a dealer-specialist in the SBT System 
in accordance with the provisions of this Chapter. Registered SBT 
Market-Makers are designated as specialists on the Exchange for all 
purposes under the Securities Exchange Act of 1934 and the Rules and 
Regulations thereunder. Only transactions that are (i) transacted on 
the SBT System or (ii) that qualify under Rule 8.1 shall count as 
Market-Maker transactions for purposes of this Chapter and Rules 8.1 
and 12.3(b)(2). An SBT Market-Maker may be either: an SBT Standard 
Market-Maker, an SBT Lead Market-Maker or an SBT Designated Primary 
Market-Maker.
* * * * *
Registration of Market-Makers
Rule 44.2
    (a) An applicant for registration as an SBT Market-Maker shall file 
his application in writing with the Membership Department on such form 
or forms as the Exchange may prescribe. Applications shall be reviewed 
by the Membership Committee, which shall consider an applicant's 
ability as demonstrated by his passing an examination prescribed by the 
Exchange, and such other factors as the Committee deems appropriate. 
After reviewing the application, the Committee shall either approve or 
disapprove the applicant's registration as an SBT Market-Maker.
    (b) The registration of any person as an SBT Market-Maker may be 
suspended or terminated by the appropriate Market Performance Committee 
upon a determination that such person has failed to properly perform as 
an SBT Market-Maker.
    (c) Any member or prospective member adversely affected by a 
determination of the appropriate Market Performance Committee under 
this Rule may obtain a review in accordance with the provisions of 
Chapter XIX.
* * * * *
Appointment of SBT Market-Makers
Rule 44.3
    (a) On a form or forms prescribed by the Exchange, a registered SBT 
Market-Maker may apply for an Appointment (having the obligations of 
Rule 44.4) in one or more classes of option contracts traded on the SBT 
System. From among those SBT Market-Makers registered, the appropriate 
Market Performance Committee shall ordinarily make two or more 
Appointments for each class of option contracts traded on the System. 
In making such Appointments, the Committee shall give attention to (1) 
the preference of registrants; (2) the maintenance and enhancement of

[[Page 31012]]

competition among SBT Market-Makers in each class of options; and (3) 
assuring that financial resources available to an SBT Market-Maker 
enable him to satisfy the obligations set forth in Rule 44.4 with 
respect to each class of option contracts to which he is appointed. The 
appropriate Market Performance Committee may arrange two or more 
classes of options into groupings and make Appointments to those 
groupings rather than to individual classes. The appropriate Market 
Performance Committee may suspend or terminate any Appointment of an 
SBT Market-Maker under this Rule and may make additional Appointments 
whenever, in the Committee's judgment, the interests of a fair and 
orderly market are best served by such action.
    (b) An SBT Market-Maker's refusal to accept an Appointment may be 
deemed sufficient cause for termination or suspension of an SBT Market-
Maker's registration.
    (c) The appropriate Market Performance Committee may limit the 
number of classes which an SBT Market-Maker may trade outside of his 
Appointment either on the floor of the Exchange or on the SBT System on 
a daily basis or for some other designated period of time. Unless 
exempted by the appropriate Market Performance Committee, to the extent 
an SBT Market-Maker trades in an option class outside his Appointment, 
that SBT Market-Maker becomes subject to the requirements of Rule 44.4 
for that option class for that day or for a designated period as 
determined by the appropriate Market Performance Committee.
    (d) The appointment of an SBT Market-Maker to an option class 
traded on the System will not count against that Member's limit of ten 
trading stations to which that Member may be appointed pursuant to Rule 
8.3(c).
    * * * Interpretations and Policies:
    .01  SBT Lead Market-Makers. A member organization desiring to be 
approved to act as an SBT LMM shall file an application with the 
Exchange on such form or forms as the Exchange may prescribe. The 
appropriate Market Performance Committee may appoint one or more SBT 
LMMs to an option class traded on the System if those option classes 
have not been assigned to an SBT DPM. If the appropriate Market 
Performance Committee appoints more than one SBT LMM per trading 
session to an option class traded on the System, the appointed SBT LMMs 
will function as SBT LMMs on a rotating basis in accordance with a 
schedule set by the appropriate Market Performance Committee. SBT LMMs 
will have the obligations of SBT Market-Makers plus those additional 
obligations set forth in Interpretation .01 to Rule 44.4.
* * * * *
Obligations of SBT Market-Makers
Rule 44.4
    (a) General. Transactions of an SBT Market-Maker should constitute 
a course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market, and no SBT Market-Maker 
should enter into transactions or make bids or offers that are 
inconsistent with such a course of dealings.
    (b) RFQ Response. With respect to each class of option contracts 
for which he holds an Appointment under Rule 44.3 and for any other 
classes that he trades as required by Rule 44.3(c), an SBT Market-Maker 
has an obligation to respond to that percentage of RFQs as determined 
by the appropriate Market Performance Committee with a two-sided market 
at or within the widths prescribed in the table below within the amount 
of time specified by the appropriate Market Performance Committee from 
the time the RFQ is entered. The SBT Market-Maker shall specify the 
size at which he is willing to trade the series. The size shall not be 
less than a minimum specified by the appropriate Market Performance 
Committee. The SBT Market-Maker responding to the RFQ is required to 
maintain a continuous market in that series for a subsequent 30-second 
period (or for some other time specified by the appropriate Market 
Performance Committee) or until his quote is filled. An SBT Market-
Maker may change his quotes during this subsequent 30-second period but 
he may not cancel them without replacing them. If the SBT Market-Maker 
does cancel without replacing the quote his response to the RFQ will 
not count toward the SBT Market-Maker's percentage requirement set 
forth in this paragraph (b). An SBT Market-Maker will be considered to 
have responded to the RFQ if he has a quote in the market for the 
series at the time the RFQ is received and he maintains it for the 
appropriate period of time. An SBT Market-Maker must respond to a 
percentage, to be established by the appropriate Market Performance 
Committee, of the Special RFQs that the SBT Market-Maker is sent. The 
bid/ask differentials listed in the table below shall not apply to in-
the-money series where the underlying securities market is wider than 
the widths set forth below. For those series, the bid/ask differential 
may be as wide as the quotation on the primary market of the underlying 
security.

------------------------------------------------------------------------
                                                               Maximum
                                                              allowable
                         Bid range                              quote
                                                                spread
------------------------------------------------------------------------
Less than $2.00............................................        $0.25
$2.00-$5.00................................................         0.40
$5.01-$10.00...............................................         0.50
$10.01-$20.00..............................................         0.80
$20.01-higher..............................................         1.00
------------------------------------------------------------------------

    (c) Classes of Option Contracts Other than those to which 
Appointed. With respect to classes of option contracts in which he does 
not hold an Appointment, an SBT Market-Maker should not engage in 
transactions for an account in which he has an interest which are 
disproportionate in relation to, or in derogation of, the performance 
of his obligations as specified in paragraph (b) of this Rule with 
respect to those classes of option contracts to which he does hold an 
Appointment. Whenever an SBT Market-Maker submits a two-sided quote in 
an option class to which he is not appointed, he must fulfill the 
obligations established by paragraph (b) of this Rule for the rest of 
that trading session.
    (d) Obligations during an ETH Session. Depending upon the liquidity 
in any of the underlying markets during an ETH session, the appropriate 
Market Performance Committee may determine not to impose an RFQ 
response requirement upon SBT market-makers or may impose a different 
RFQ response rate than is applicable during the regular trading hours.
    (e) Exemptions. The appropriate Market Performance Committee may 
establish bid/ask widths different than those specified above for one 
or more option series. The appropriate Market Performance Committee may 
also vary the RFQ response rate on a series-by-series basis. Two 
Trading Officials may also vary the bid/ask differences or the RFQ 
response rate in the event of unusual market conditions
    * * * Interpretations and Policies:
    .01  SBT Lead Market-Makers.
    (a) Each SBT LMM shall fulfill all of the obligations of an SBT 
Market-Maker under the Rules, and shall satisfy each of the following 
requirements, in respect of each of the securities appointed to the SBT 
LMM, during such SBT LMM's rotation(s) as an LMM:
    (1) Assure that its disseminated market quotations are accurate;
    (2) provide opening quotes for all series in its appointed classes;
    (3) trade in all securities appointed to the SBT LMM only in the 
capacity of an

[[Page 31013]]

SBT LMM and not in any other capacity;
    (4) handle orders that are not executed on the System due to the 
fact that there is a better quote on another market;
    (5) respond to a percentage of the RFQs at a rate as designated by 
the appropriate Market Performance Committee. The appropriate Market 
Performance Committee may also require that an SBT LMM provide 
continuous quotes in some or all of the series of the classes appointed 
to an SBT LMM; and
    (6) supervise all persons associated with the SBT LMM to assure 
compliance with the Rules.
    (b) Subject to the review of the Board of Directors, the 
appropriate Market Performance Committee may establish from time to 
time a participation entitlement formula that is applicable to all SBT 
LMMs. The maximum guaranteed percentage entitlement for an SBT LMM 
shall be 40%, although the participation of an SBT LMM on any 
particular trade may be greater if the applicable allocation and 
priority rules provide for a pro rata distribution. To the extent 
established pursuant to this paragraph and pursuant to the applicable 
trading allocation and priority rules, each SBT LMM shall have a right 
to participate for its own account with the other SBT Traders in 
transactions in securities appointed to the SBT LMM that occur at the 
SBT LMM's previously established bid or offer whether the bid or offer 
was established by a quote or an order. The appropriate Market 
Performance Committee may determine whether the participation 
entitlement shall be applicable to the opening transaction.
* * * * *
Quote Maintenance
Rule 44.5
    (a) Generally. An SBT Market-Maker will have the following 
functional capabilities for maintaining his quotes in the SBT Book:
    (1) An SBT Market-Maker may delete or cancel a specific quote;
    (2) An SBT Market-Maker may delete or cancel all of his quotes in a 
specified class, or all of his quotes in all classes;
    (3) An SBT Market-Maker may inactivate his quotes for a certain 
period of time, if the System is so enabled; and
    (4) An SBT Market-Maker may cancel/replace or update an existing 
quote.
    (b) Automatic Quote Regeneration. Once the System is so enabled to 
provide this function, an SBT Market-Maker may have the SBT System 
regenerate his quote when his bid or offer is filled. The SBT System 
will regenerate a new quote where the bid/offer is a pre-defined number 
of ticks worse than the previous bid/offer (the number of ticks will be 
defined by the SBT Market-Maker) and the size of the quote will be set 
by the SBT Market-Maker. The priority of the regenerated quote will be 
as described in Rule 43.1(e). When a bid/offer is regenerated the 
designated number of ticks worse than the previous bid/offer, the SBT 
System will keep the opposite side at the same price unless the 
resulting spread is wider than the Exchange prescribed width as set 
forth in Rule 44.4. If the resulting spread would be wider, then the 
SBT System will adjust the opposite side's price (cancel/replace the 
old order) (i) to keep the same spread before the regeneration, or (ii) 
adjust it to bring the spread to the Exchange prescribed width, as 
determined by the SBT Market-Maker.
    (c) Quote Risk Monitor Function. The SBT System will provide for an 
SBT Market-Maker to establish a contract volume limit for a class for a 
period of time designated by the SBT Market-Maker. If trades against an 
SBT Market-Maker's quotes in that class exceed the established volume 
limit within the designated period of time (e.g., 200 contracts within 
the most recent ten second period), then the SBT System will cancel the 
SBT Market-Maker's remaining quotes for that class. The appropriate 
Market Performance Committee may establish minimum volume limits and 
minimum time periods for all SBT Market-Makers. The System will not 
consider trades the SBT Market-Maker initiates by hitting a bid or 
taking an offer in determining whether the volume limit is exceeded.
    (d) Managing Quote Traffic. The Exchange may set limits on the 
quote traffic that is sent to the SBT System to prevent the SBT System 
from becoming overloaded.
    (e) Logoff. An SBT Market-Maker's logoff from the SBT System will 
cause the System to delete all his quotes from the SBT Book. Non-quote 
orders will remain in the Book unless they are expiring orders.
* * * * *
Market-Making through an API
Rule 44.6
    The Exchange may limit the number of Market-Makers that may access 
the SBT System through an API (or the number of messages sent by 
Market-Makers accessing the System through an API) in order to protect 
the integrity of the System. In addition, the Exchange may impose 
restrictions on the use of a computer connected through an API if it 
believes such restrictions are necessary to ensure the proper 
performance of the System.
* * * * *
Rule 44.7-44.9  Reserved
* * * * *

Section B: SBT Designated Primary Market-Makers

* * * * *
SBT DPM Defined
Rule 44.10
    An ``SBT Designated Primary Market-Maker'' or ``SBT DPM'' is a 
member organization that is approved by the Exchange to function on the 
SBT System in allocated securities as an SBT Market-Maker (as defined 
in Rule 44.1) with the additional obligations provided for in this 
Section B of Chapter 44. Determinations concerning whether to grant or 
withdraw the approval to act as an SBT DPM are made by the appropriate 
SBT DPM Appointments Committee (``SBT DPM Committee'') in accordance 
with Rules 44.12. SBT DPMs are allocated securities by the appropriate 
Allocation Committee in accordance with Rule 8.95.
* * * * *
SBT DPM Designees
Rule 44.11
    (a) An SBT DPM may act as an SBT DPM solely through its SBT DPM 
Designees. An ``SBT DPM Designee'' is an individual who is approved by 
the SBT DPM Committee to represent an SBT DPM in its capacity as an SBT 
DPM. The SBT DPM Committee may subclassify SBT DPM Designees and 
require that certain SBT DPM Designees be subject to specified 
supervision and/or be limited in their authority to represent a SBT 
DPM.
    (b) Notwithstanding any other rules to the contrary, an individual 
must satisfy the following requirements in order to be an SBT DPM 
Designee of an SBT DPM:
    (1) The individual must be a member of the Exchange;
    (2) the individual must be a nominee of the SBT DPM or of an 
affiliate of the SBT DPM or must own a membership that has been 
registered for the SBT DPM or for an affiliate of the SBT DPM;
    (3) the individual must be registered as an SBT Market-Maker 
pursuant to Rule 44.1;
    (4) on such form or forms as the Exchange may prescribe, the SBT 
DPM must authorize the individual to enter into Exchange transactions 
on behalf of the SBT DPM in its capacity as an SBT

[[Page 31014]]

DPM, must authorize the individual to represent the SBT DPM in all 
matters relating to the fulfillment of the SBT DPM's responsibilities 
as an SBT DPM, and must guaranty all obligations arising out of the 
individual's representation of the SBT DPM in its capacity as an SBT 
DPM in all matters relating to the Exchange; and
    (5) the individual must be approved by the SBT DPM Committee to 
represent the SBT DPM in its capacity as an SBT DPM.
    Notwithstanding the provisions of sub-paragraph (b)(2) of this 
Rule, the SBT DPM Committee shall have the discretion to permit an 
individual who is not affiliated with an SBT DPM to act as an SBT DPM 
Designee for the SBT DPM on an emergency basis provided that the 
individual satisfies the other requirements of sub-paragraph (b) of 
this Rule.
    (c) The approval of an individual to act as an SBT DPM Designee 
shall expire in the event the individual does not have trading 
privileges on the Exchange for a six month time period.
    (d) An SBT DPM Designee of an SBT DPM may not trade as a Market-
Maker in securities allocated to the SBT DPM unless the SBT DPM 
Designee is acting on behalf of the SBT DPM in its capacity as an SBT 
DPM.
* * * * *
Approval To Act as an SBT DPM
Rule 44.12
    (a) A member organization desiring to be approved to act as an SBT 
DPM shall file an application with the Exchange on such form or forms 
as the Exchange may prescribe.
    (b) The SBT DPM Committee shall determine the appropriate number of 
approved SBT DPMs. Each SBT DPM approval shall be made by the SBT DPM 
Committee from among the SBT DPM applications on file with the 
Exchange, based on the SBT DPM Committee's judgment as to which 
applicant is best able to perform the functions of an SBT DPM. Factors 
to be considered in making such a selection may include, but are not 
limited to, any one or more of the following:
    (1) Adequacy of capital;
    (2) operational capacity;
    (3) trading experience of and observance of generally accepted 
standards of conduct by the applicant, its associated persons, and the 
SBT DPM Designees who will represent the applicant in its capacity as 
an SBT DPM;
    (4) number and experience of support personnel of the applicant who 
will be performing functions related to the applicant's SBT DPM 
business;
    (5) regulatory history of and history of adherence to Exchange 
Rules by the applicant, its associated persons, and the SBT DPM 
Designees who will represent the applicant in its capacity as an SBT 
DPM;
    (6) willingness and ability of the applicant to promote the 
Exchange as a marketplace;
    (7) performance evaluations conducted pursuant to Exchange rules; 
and
    (8) in the event that one or more shareholders, directors, 
officers, partners, managers, members, SBT DPM Designees, or other 
principals of an applicant is or has previously been a shareholder, 
director, officer, partner, manager, member, SBT DPM Designee, DPM 
Designee, or other principal in another SBT DPM or DPM, adherence by 
such SBT DPM to the requirements set forth in Exchange rules regarding 
DPM or SBT DPM responsibilities and obligations during the time period 
in which such person(s) held such position(s) with the SBT DPM or DPM.
    (c) Each applicant for approval as an SBT DPM will be given an 
opportunity to present any matter which it wishes the SBT DPM Committee 
to consider in conjunction with the approval decision. The SBT DPM 
Committee may require that a presentation be solely or partially in 
writing, and may require the submission of additional information from 
the applicant or individuals associated with the applicant. Formal 
rules of evidence shall not apply to these proceedings.
    (d) In selecting an applicant for approval as an SBT DPM, the SBT 
DPM Committee may place one or more conditions on the approval, 
including, but not limited to, conditions concerning the capital, 
operations, or personnel of the applicant and the number or type of 
securities which may be allocated to the applicant.
    (e) Each SBT DPM shall retain its approval to act as an SBT DPM 
until the SBT DPM Committee relieves the SBT DPM of its approval and 
obligations to act as an SBT DPM or the SBT DPM Committee terminates 
the SBT DPM's approval to act as an SBT DPM.
    (f) If a member organization resigns as an SBT DPM or if the SBT 
DPM Committee terminates or otherwise limits its approval to act as an 
SBT DPM, the SBT DPM Committee shall have the discretion to do one or 
both of the following:
    (1) Approve an interim SBT DPM, pending the final approval of a new 
SBT DPM pursuant to paragraphs (a) through (d) of this Rule; and
    (2) allocate on an interim basis to another SBT DPM or to other SBT 
DPMs the securities that were allocated to the affected SBT DPM, 
pending a final allocation of such securities pursuant to Rule 8.95.
    Neither an interim approval or allocation made pursuant to this 
paragraph (f) should be viewed as a prejudgment with respect to the 
final approval or allocation.
* * * * *
Conditions on the Allocation of Securities to SBT DPMs
Rule 44.13
    The SBT DPM Committee may establish (i) restrictions applicable to 
all SBT DPMs on the concentration of securities allocable to a single 
SBT DPM and to affiliated SBT DPMs and (ii) minimum eligibility 
standards applicable to all SBT DPMs which must be satisfied in order 
for an SBT DPM to receive allocations of securities, including but not 
limited to standards relating to adequacy of capital and number of 
personnel.
* * * * *
Termination, Conditioning, or Limiting Approval to Act as a DPM
Rule 44.13A
    (a) The SBT DPM Committee may terminate, place conditions upon, or 
otherwise limit a member organization's approval to act as an SBT DPM 
under any one or more of the following circumstances:
    (1) If the member organization incurs a material financial, 
operational, or personnel change;
    (2) if the member organization fails to comply with any of the 
requirements under this Section B of Chapter XLIV or the applicable 
provisions of Section B of Chapter VIII or fails to adequately satisfy 
the standards of performance under Rule 8.88(a);
    (3) if for any reason the member organization should no longer be 
eligible for approval to act as a DPM or to be allocated a particular 
security or securities.
    Before the MTS Committee takes action to terminate, condition, or 
otherwise limit a member organization's approval to act as an SBT DPM, 
the member organization will be given notice of such possible action 
and an opportunity to present any matter which it wishes the MTS 
Committee to consider in determining whether to take such action. Such 
proceedings shall be conducted in the same manner as SBT DPM Committee 
proceedings concerning SBT DPM approvals which are governed by Rule 
44.12(c).
    (b) Notwithstanding the provisions of paragraph (a) of this Rule, 
the SBT DPM

[[Page 31015]]

Committee has the authority to immediately terminate, condition, or 
otherwise limit a member organization's approval to act as an SBT DPM 
if it incurs a material financial, operational, or personnel change 
warranting such action or if the member organization fails to comply 
with any of the financial requirements of Rule 8.86.
    (c) Limiting a member organization's approval to act as an SBT DPM 
may include, among other things, limiting or withdrawing the member 
organization's SBT DPM participation entitlement provided for under 
Rule 44.15, withdrawing the right of the member organization to act in 
the capacity of an SBT DPM in a particular security or securities which 
have been allocated to the member organization, and/or requiring the 
relocation of the member organization's SBT DPM operation on the 
Exchange's trading floor.
    (d) If a member organization's approval to act as an SBT DPM is 
terminated, conditioned, or otherwise limited by the SBT DPM Committee 
pursuant to this Rule, the member organization may seek review of that 
decision under Chapter XIX of the Rules.
* * * * *
SBT DPM Obligations
Rule 44.14
    (a) Each SBT DPM shall fulfill all of the obligations of an SBT 
Market-Maker under the Rules, and shall satisfy each of the following 
requirements, in respect of each of the securities allocated to the 
DPM:
    (1) Assure that its disseminated market quotations are accurate;
    (2) Provide opening quotes for all series in its allocated classes;
    (3) Trade in all securities allocated to the SBT DPM only in the 
capacity of an SBT DPM and not in any other capacity;
    (4) Handle orders that are not executed on the System due to the 
fact that there is a better quote on another market;
    (5) Respond to a percentage of the RFQs at a rate as designated by 
the appropriate Market Performance Committee. The appropriate Market 
Performance Committee may also require that an SBT DPM provide 
continuous quotes in some or all of the series of the classes assigned 
to an SBT DPM; and
    (6) Segregate in a manner prescribed by the appropriate SBT DPM 
Committee (A) all transactions consummated by the SBT DPM in securities 
allocated to the SBT DPM and (B) any other transactions consummated by 
or on behalf of the SBT DPM that are related to the SBT DPM's DPM 
business.
    To the extent that there is any inconsistency between the specific 
obligations of an SBT DPM set forth in sub-paragraphs (a)(1) through 
(a)(5) of this Rule and the general obligations of an SBT Market-Maker 
under the Rules, sub-paragraphs (a)(1) through (a)(5) of this Rule 
shall govern.
    (b) Other Obligations. In addition to the obligations described in 
paragraph (a) of this Rule, an SBT DPM shall fulfill each of the 
following obligations:
    (1) Act to increase the Exchange's order flow in the securities 
which are allocated to the SBT DPM and respond to competitive 
developments by improving market quality and service and otherwise 
acting to increase the Exchange's market share in those securities;
    (2) Promptly inform the SBT DPM Committee of any desired change in 
the SBT DPM Designees who represent the SBT DPM in its capacity as an 
SBT DPM and of any material change in the financial or operational 
condition of the SBT DPM;
    (3) Supervise all persons associated with the SBT DPM to assure 
compliance with the Rules;
    (4) Continue to act as an SBT DPM and to fulfill all of the SBT 
DPM's obligations as an SBT DPM until the SBT DPM Committee relieves 
the SBT DPM of its approval and obligations to act as an SBT DPM or the 
SBT DPM Committee terminates the SBT DPM's approval to act as an SBT 
DPM; and
    (5) Segregate in a manner prescribed by the appropriate SBT DPM 
Committee the SBT DPM's business and activities as an SBT DPM from the 
SBT DPM's other business and activities.
    (c) Obligations of SBT DPM Associated Persons. Each person 
associated with an SBT DPM shall be obligated to comply with the 
provisions of this Rule when acting on behalf of the SBT DPM.
* * * * *
Participation Entitlement of SBT DPMs
Rule 44.15
    (a) Subject to the review of the Board of Directors, the SBT DPM 
Committee may establish from time to time a participation entitlement 
formula that is applicable to all SBT DPMs. The maximum guaranteed 
percentage entitlement for an SBT DPM shall be 40%, although the 
participation of an SBT DPM on any particular trade may be greater if 
the applicable allocation and priority rules provide for a pro rata 
distribution.
    (b) To the extent established pursuant to paragraph (a) of this 
Rule and pursuant to the applicable trading allocation and priority 
rules, each SBT DPM shall have a right to participate for its own 
account with the other SBT Traders in transactions in securities 
allocated to the SBT DPM that occur at the SBT DPM's previously 
established bid or offer whether the bid or offer was established by a 
quote or an order. The SBT DPM Committee may determine whether the 
participation entitlement shall be applicable to the opening 
transaction.
* * * * *
Allocation of SBT DPMs
Rule 44.16
    Different members may be allocated the same class for different 
trading sessions, that is, an SBT DPM may be allocated a particular 
option class in one trading session but not another. Also, the 
appropriate SBT DPM Committee may allocate classes to SBT DPMs on a 
rotating basis such that the SBT DPM assigned to a particular option 
class for a particular trading session rotates between two or more SBT 
DPMs on a periodic basis.
* * * * *

Chapter XLV

Section A: SBT Brokers

SBT Broker Defined
Rule 45.1
    An SBT Broker is an individual (either a member or a nominee of a 
member organization) who is registered with the Exchange for the 
purpose of accepting and executing orders received from members, from 
registered broker-dealers, or from public customers on the SBT System. 
An SBT Broker shall not accept an order from any source other than a 
member or a registered broker-dealer unless he is either the nominee 
of, or has registered his individual membership for, a member 
organization approved to transact business with the public in 
accordance with Rule 9.1. In the event the organization is approved 
pursuant to Rule 9.1, an SBT Broker who is the nominee of, or who has 
registered his individual membership for such organization, may then 
accept orders directly from public customers where (i) the organization 
clears and carries the customer account or (ii) the organization has 
entered into an agreement with the public customer to execute orders on 
its behalf. Among the requirements an SBT Broker must meet in order to 
register pursuant to Rule 9.1 is the successful completion of an 
examination for the purpose of

[[Page 31016]]

demonstrating an adequate knowledge of the securities business.
* * * * *
Registration of SBT Brokers
Rule 45.2
    (a) An applicant for registration as an SBT Broker shall file his 
application in writing with the Membership Department on such form or 
forms as the Exchange may prescribe. Applications shall be reviewed by 
the Membership Committee, which shall consider an applicant's ability 
as demonstrated by his passing an examination prescribed by the 
Exchange, and such other factors as the Committee deems appropriate. 
After reviewing the application, the Committee shall either approve or 
disapprove the applicant's registration as an SBT Broker.
    (b) The registration of any person as an SBT Broker may be 
suspended or terminated by the appropriate Market Performance Committee 
upon a determination that such person has failed to properly perform as 
an SBT Broker.
    (c) Any member or prospective member adversely affected by a 
determination of the appropriate Market Performance Committee under 
this Rule may obtain a review in accordance with the provisions of 
Chapter XIX.
    (d) An SBT Broker must receive authorization, in a manner 
prescribed by the Exchange, by a clearing member prior to entering 
orders for a clearing member.
* * * * *
Rule 45.3 to Rule 45.10  Reserved
* * * * *

Section B: Clearing Firm Broker Functions

Clearing Firm Broker Functions
Rule 45.11
    (a) Defined. A Clearing Firm Broker is an individual who represents 
the Clearing Firm of a particular SBT Market-Maker and has the 
authority to take certain actions with respect to that SBT Market-
Maker's use of the SBT System.
    (b) Forced Logout of Trader. The Clearing Firm User may request the 
Help Desk to logout an SBT Market-Maker. Upon the logout of an SBT 
Market-Maker, the System cancels all the quotes for that SBT Market-
Maker. The logout can also be used to cancel all the trader's regular 
orders and de-authorize the trader as a user. In the event the trader 
has been de-authorized, the System will not permit an SBT Market-Maker 
who has been forcibly logged out to log in again until he is re-
authorized as an SBT Trader by the Clearing Firm User.
* * * * *

Chapter XLVI

System Operator/Administrator Functions and Data Dissemination 
Functions

* * * * *
Quote and Trading Information
Rule 46.1
    (a) Internal Dissemination of Quote. The SBT System will 
disseminate the best bid and offer internally. As each new limit order 
(whether as an order or as part of a market-maker quote) is entered 
into the SBT System, the best bid and offer displayed in the System is 
updated to the extent the new bid or offer improves the previously 
displayed bid or offer. The SBT System will send quote/order 
information--series, price, size, and order source (Market-Maker, 
customer, or non-customer professional order)--to the SBT workstations 
that are trading a given class. The SBT System will also provide the 
current best bid or offer in any other market, as such best bids or 
offers are identified in the System.
    (b) Internal Dissemination of Price/Last Sale. The SBT System may 
disseminate internally to subscribers that have indicated interest in a 
given class last sale information including series, price, and size. 
All SBT Market-Makers assigned to a given class will be provided this 
information but other individuals and firms may subscribe to this 
information as well.
    (c) Booked Order Dissemination. When an SBT Trader or authorized 
access point requests information for an option class, the SBT System 
will provide the information which presents the Book's best bids, asks, 
and their total volumes for each series of the class requested. The 
Exchange may delete or add categories of disseminated information as it 
deems appropriate.
    (d) Book Depth. Upon request, SBT Traders can access from the SBT 
System market depth information including the aggregate size and the 
number of contracts at each price. The Exchange may charge fees for 
access to this information. The information may not be provided upon 
request if the Exchange believes that it could lead to degradation of 
the service of the SBT System.
* * * * *
Dissemination of Market Information
Rule 46.2
    The SBT System will disseminate quote and trade (last sale) 
information externally. Series, price and size will be disseminated for 
trades. Series and price and size will be disseminated for quotes. 
Every best Book bid or ask change will generate a quote report. The SBT 
quote width may be wider than the legal width market because two 
unrelated orders, separated by more than the legal width market, may be 
the best orders, causing the System to send their prices as the best 
quote.
* * * * *
Proprietary Information of the Exchange
Rule 46.3
    Information sent over the Exchange's SBT System to the SBT Traders 
and participants is proprietary information of the Exchange and may not 
be distributed or shared without written permission of the Exchange.
* * * * *

Chapters XLVII to XLIX  [Reserved]

* * * * *

Appendix A--Applicability of Rules of the Exchange

    This Appendix lists the rules in Chapters I (1) through XXVII 
(27) of the rules of the Exchange that apply to the trading of 
products on the Exchange's screen based trading system. Where a rule 
in Chapters 1 through 27 is supplemented by a rule in Chapters 40 
through 49, that fact is so indicated.

------------------------------------------------------------------------
                    Existing rule                       Supplemented by
------------------------------------------------------------------------
                         Chapter I--Definitions
------------------------------------------------------------------------
1.1  Definitions....................................                40.1

[[Page 31017]]

 
------------------------------------------------------------------------
              Chapter II--Organization and Administration
                           Part A: Committees
------------------------------------------------------------------------
2.1  Committees of the Exchange
------------------------------------------------------------------------
                           Part B: Departments
------------------------------------------------------------------------
2.15  Departments of Exchange
------------------------------------------------------------------------
                  Part C: Dues, Fees and Other Charges
------------------------------------------------------------------------
2.20  Membership Dues
2.21  Charge on Net Commissions
2.22  Other Fees or Charges
2.23  Liability for Payment
2.24  Exchange's cost of defending legal proceedings
------------------------------------------------------------------------
                         Chapter III--Membership
------------------------------------------------------------------------
3.1  Public Securities Business
3.2  Qualifications and Membership Statuses of
 Individual Members
3.3  Qualifications and Membership Statuses of
 Member Organizations
3.4  Qualifications of Foreign Member Organizations
3.5  Denial of and Conditions to Membership and
 Associations
3.6  Persons Associated With Member Organizations
3.6A  Qualifications and Registration of Certain
 Associated Persons
3.7  Certain Documents Required of Members,
 Applicants and Associated Persons
3.8  Nominees and Members Who Register Their
 Memberships for Member Organizations
3.9  Application Procedures and Approval or                         41.1
 Disapproval........................................
3.10  Effectiveness of Membership or Approved
 Associated Person Status
3.11  Notice of Effectiveness of Membership or
 Approved Associated Person Status
3.12  Membership Rights and Restrictions on Their
 Transfer
3.13  Purchase of Membership
3.14  Sale and Transfer of Membership
3.15  Proceeds from Sale of Membership
3.16  Special Provisions Regarding Chicago Board of
 Trade Exerciser Memberships
3.17  Leased Memberships
3.18  Members and Associated Persons Who Are or
 Become Subject to a Statutory Disqualification
3.19  Termination from Membership
3.20  Dissolution and Liquidation of Member
 Organizations
3.21  Obligations of Terminating Members
3.22  [Reserved]
3.23  Integrated Billing System
3.24  Member Death Benefit
3.25  Transfer of Individual Membership in Trust
3.26  IPC Permits
3.27  Options Trading Permits
3.28  Extension of Time Limits
3.29  Delegation of Authority
------------------------------------------------------------------------
                      Chapter IV--Business Conduct
------------------------------------------------------------------------
4.1  Just and Equitable Principles of Trade
4.2  Adherence to Law
4.3  Sharing of Offices and Wire Connections
4.4  Gratuities
4.5  Nominal Employment
4.6  False Statements
4.7  Manipulation
4.8  Rumors
4.9  Disciplinary Action by Other Organizations
4.10  Other Restrictions on Members
4.11  Position limits
4.12  Exercise limits
4.13  Reports related to position limits
4.14  Liquidation of positions
4.15  Limit on outstanding uncovered short position
4.16  Other restrictions on options transactions and
 exercises
4.18  Prevention of misuse of material, nonpublic
 information
------------------------------------------------------------------------
                     Chapter V--Securities Dealt In
------------------------------------------------------------------------
5.1  Designation of securities
5.2  Rights and obligations of holders and writers
5.3  Criteria for underlying securities
5.4  Withdrawal of approval of underlying securities

[[Page 31018]]

 
5.5  Series of option contracts open for trading
5.7  Adjustments
5.8  Long-Term Equity Option Series (LEAPSTM)
------------------------------------------------------------------------
            Chapter VI--Doing Business on the Exchange Floor
                           Section A: General
------------------------------------------------------------------------
6.1  Days and Hours of Business.....................                42.1
6.3  Trading Halts..................................                43.4
6.3B  Trading Halts Due to Extraordinary Market                     43.4
 Volatility.........................................
6.5  Limitation on Dealings.........................
6.6  Unusual Market Conditions......................                43.4
6.7  Use of Facilities of Exchange
6.7A  Legal proceedings against Exchange directors,
 officers, employees or agents
------------------------------------------------------------------------
                Section B: Member Activities on the Floor
------------------------------------------------------------------------
6.20  Admission to and Conduct on the Trading Floor
------------------------------------------------------------------------
               Section C: Trading Practices and Procedures
------------------------------------------------------------------------
6.40  Unit of trading
6.41  Meaning of premium bids and offers
6.43  Manner of bidding and offering
6.49  Transactions off the Exchange
6.50  Submission for Clearance
6.52  Price Binding Despite Erroneous Report
6.53  Certain Types or Orders Defined...............                43.3
6.58  Submission of trade information to the
 Exchange
6.64  Maintaining Office and Filing Signatures
6.65  Written Contracts
6.66  Comparison Does Not Create Contract
------------------------------------------------------------------------
                        Section D: Floor Brokers
------------------------------------------------------------------------
6.72  Letters of Authorization
6.73  Responsibilities of Floor Brokers
6.76  Payment for Floor Brokerage Services
6.75  Discretionary transactions
------------------------------------------------------------------------
Chapter VIII--Market-Makers, Trading Crowds and Modified Trading Systems
 
                        Section A: Market-Makers
------------------------------------------------------------------------
8.5  Letters of Guarantee
8.8  Restriction on Acting as Market-Maker and Floor
 Broker
8.9  Securities Accounts and Orders of Maker-Makers
8.10  Financial Arrangements of Market-Makers
8.11  Transactions for Public Customers
------------------------------------------------------------------------
           Section B: Evaluation of Trading Crowd Performance
------------------------------------------------------------------------
8.51  Trading Crowd Firm Disseminated Market Quotes
8.60  Evaluation of Trading Crowd Performance
------------------------------------------------------------------------
                   Section C: Modified Trading System
------------------------------------------------------------------------
8.86  DPM Financial Requirements
8.88(a) and (b)  Review of DPM Operation and
 Performance
8.89  Transfer of DPM Appointments
8.91  Limitations on Dealings of DPMs and Affiliated
 Persons of DPMs
------------------------------------------------------------------------
 Section D: Allocation of Securities and Location of Trading Crowds and
                                  DPMs
------------------------------------------------------------------------
8.95  Allocation of Securities and Location of                     44.16
 Trading Crowds and DPMs............................
------------------------------------------------------------------------
               Chapter IX--Doing Business With the Public
------------------------------------------------------------------------
9.1  Exchange approval
9.2  Registration of Options Principals
9.3  Registration and Termination of Representatives
9.4  Other Affiliations of Registered
 Representatives
9.5  Discipline, Suspension, Expulsion of Registered
 Persons
9.6  Branch Offices of Member Organizations
9.7  Opening of Accounts
9.8  Supervision of Accounts

[[Page 31019]]

 
9.9  Suitability Recommendations
9.10  Discretionary Accounts
9.11  Confirmation to Customers
9.12  Statements of Accounts to Customers
9.13  Statements of Financial Condition to Customers
9.14  Addressing of Communications to Customers
9.15  Delivery of current options disclosure
 documents and prospectus
9.16  Restrictions on Pledge and Lending of
 Customers' Securities
9.17  Transactions of Certain Customers
9.18  Guarantees and Profit Sharing
9.19  Assuming Losses
9.20  Transfer of Accounts
9.21  Communications to Customers
9.22  Brokers' Blanket Bonds
9.23  Customer Complaints
9.24  Telephone solicitation
------------------------------------------------------------------------
                     Chapter X--Closing Transactions
                        Part A: Options Contracts
------------------------------------------------------------------------
10.2  Contracts of suspended members
10.3  Failure to pay premium
------------------------------------------------------------------------
                  Chapter XI--Exercises and Deliveries
------------------------------------------------------------------------
11.1  Exercise of option contracts
11.2  Allocation of exercise notices
11.3  Delivery and payment
------------------------------------------------------------------------
                          Chapter XII--Margins
------------------------------------------------------------------------
12.1  General Rule
12.2  Time Margin Must Be Obtained
12.3  Margin Requirements
12.5  Determination of Value for Margin Purposes
12.7  ``When Issued'' and ``When Distributed''
 Securities
12.8  Guaranteed Accounts
12.9  Meeting margin Calls by Liquidation Prohibited
12.10  Margin Required Is Minimum
12.11  Compliance with Margin Requirements of New
 York Stock Exchange
12.12  Daily Margin Record
------------------------------------------------------------------------
                 Chapter XIII--Net Capital Requirements
------------------------------------------------------------------------
13.1  Minimum Requirements
13.2  ``Early Warning'' Notification Requirements
13.3  Power of President to Impose Restrictions
------------------------------------------------------------------------
                        Chapter XIV--Commissions
------------------------------------------------------------------------
14.2  Reciprocal Arrangements
14.3  Commissions on Non-Member Orders
14.5  Intra-Member Rates for Floor Brokers
------------------------------------------------------------------------
                 Chapter XV--Records, Reports and Audits
------------------------------------------------------------------------
15.1  Maintenance, Retention and Furnishing of
 Books, Records and Other Information
15.2  Reports of Transactions
15.3  Reports of Uncovered Short Positions
15.4  Monthly Commission Report
15.5  Financial Reports
15.6  Audits
15.7  Automated Submission of Trading Data
15.8  Risk Analysis of Market-Maker Accounts
15.9  Regulatory Cooperation
15.10  Reporting requirements applicable to short
 sales in Nasdaq National Market
------------------------------------------------------------------------
 Chapter XVI--Summary Suspension by Chairman of the Board or Chairman of
                         the Executive Committee
------------------------------------------------------------------------
16.1  Imposition of Suspension
16.2  Investigation Following Suspension
16.3  Reinstatement
16.4  Failure to Obtain Reinstatement
16.5  Termination of Rights by Suspension

[[Page 31020]]

 
------------------------------------------------------------------------
                        Chapter XVII--Discipline
------------------------------------------------------------------------
17.1  Disciplinary Jurisdiction
17.2  Complaint and Investigation
17.3  Expedited Proceeding
17.4  Charges
17.5  Answer
17.6  Hearing
17.7  Summary Proceedings
17.8  Offers of Settlement
17.9  Decision
17.10  Review
17.11  Judgment and Sanction
17.12  Miscellaneous Provisions
17.13  Extension of time limits
17.14  Reporting to the Central Registration
 Depository
17.50  Imposition of fines for minor rule violations
------------------------------------------------------------------------
                       Chapter XVIII--Arbitration
------------------------------------------------------------------------
18.1  Matters Subject to Arbitration
18.2  Procedure in Member Controversies
------------------------------------------------------------------------
                        Uniform Arbitration Code
------------------------------------------------------------------------
18.3  Arbitration
18.3A  Class action arbitration
18.4  Simplified Arbitration
18.5  Waiver of Hearing
18.6  Time Limitation Upon Submission
18.7  Dismissal or Termination of Proceedings
18.8  Settlements
18.9  Tolling of Time Limitation(s) for the
 Institution of Legal Proceedings and Extension of
 Time Limitation(s)
for Submission to Arbitration.......................
18.10  Designation of Number of Arbitrators
18.11  Notice of Selection of Arbitrators
18.12  Peremptory Challenges
18.13  Disclosures Required or Arbitrators
18.14  Disqualification or Other Disability of
 Arbitrators
18.15  Initiation of Proceedings
18.16  Designation of Time and Place of Hearings
18.17  Representation by Counsel
18.18  Attendance at Hearings
18.19  Failure to Appear
18.20  Adjournments
18.21  Acknowledgment of Pleadings
18.24  Evidence
18.25  Interpretation of the Code and enforcement of
 arbitrator ruling
18.26  Determination of Arbitrators
18.27  Record of Proceedings
18.28  Oaths of the Arbitrators and Witnesses
18.29  Amendments
18.30  Reopening of Hearings
18.31  Awards
18.32  Miscellaneous
18.33  Schedule of Fees
18.35  Requirements when Using Pre-Dispute
 Arbitration Agreements with Customers
18.37  Failure to honor award
------------------------------------------------------------------------
                    Chapter XIX--Hearings and Review
------------------------------------------------------------------------
19.1  Scope of Chapter
19.2  Submission of Application to Exchange
19.3  Procedure Following Applications for Hearing
19.4  Hearing
19.5  Review
19.6  Miscellaneous Provisions
------------------------------------------------------------------------
                     Part B: Verification Procedures
------------------------------------------------------------------------
19.50  Scope of Part B
19.51  Definitions
19.52  Requests for verification

[[Page 31021]]

 
------------------------------------------------------------------------
               Chapter XXI--Government Securities Options
------------------------------------------------------------------------
21.1  Definitions
21.2  Wire Connections
21.3  Position limits (Treasury bonds and notes)
21.4  Exercise limits (Treasury bonds and notes)
21.5  Reports related to position limits and
 liquidation of positions (Treasury bonds and notes)
21.6  Designation of government security options
 (Treasury bonds and notes)
21.7  Approval of underlying Treasury securities for
 specific coupon options (Treasury bonds and notes)
21.8  Terms of Treasury security options (Treasury
 bonds and notes)
21.9  Series of Treasury security options open for
 trading (Treasury bonds and notes)
21.10  Days and hours of business
21.12  Trading halts and suspension of trading
21.13  Meaning of premium bids and offers (Treasury
 bonds and notes)
21.16  Reconciliation of unmatched trades
21.17  Responsibilities of floor brokers
21.18  Post coordinators for government securities
 options
21.19  Obligations of market-makers (Treasury bonds
 and notes)
21.19A  Doing business with the public
21.23  Allocation of exercise assignment notices
21.24  Delivery and payment (Treasury bonds and
 notes)
21.25  Margin requirements
21.30  Furnishing of Books, records and other
 information
21.31  Special rules for Treasury bill options
------------------------------------------------------------------------
              Chapter XXIII--Interest Rate Option Contracts
------------------------------------------------------------------------
23.1  Definitions
23.2  Wire connections
23.3  Position limits
23.4  Exercise limits
23.5  Terms of interest rate option contract
23.6  Days and hours of business
23.8  Trading halts and suspension of trading
23.9  Meaning of premium--bids and offers
23.10  Accommodation liquidations
23.11  Reconciliation of unmatched trades
23.12  Responsibilities of floor brokers
23.13  Margin requirements
23.14  Limitation of liability
23.15  Furnishing of books, records and other
 information
------------------------------------------------------------------------
                       Chapter XXIV--Index Options
------------------------------------------------------------------------
24.1  Definitions
24.2  Designation of the index
24.3  Dissemination of information
24.4  Position limits for broad-based index options
24.4A  Position limits for industry index options
24.5  Exercise limits
24.6  Days and hours of business
24.7  Trading halts or suspensions
24.8  Meaning of premium bids and offers
24.9  Terms of index option contracts
24.10  Restrictions on contracts
24.11  Margins
24.11A  Debit put spread cash account transactions
24.13  Trading rotations
24.14  Disclaimers
24.18  Exercise of American-style index options
------------------------------------------------------------------------
                      Chapter XXVI--Market Baskets
------------------------------------------------------------------------
26.1  Definitions
26.2  Terms of market basket contracts
26.3  Meaning of bids and offers
26.4  Dissemination of information
26.5  Opening of trading
26.6  Position limits
26.7  Exercise limits
26.8  Delivery and payment
26.9  Margins
26.10  Doing business with the public
26.11  Market-makers

[[Page 31022]]

 
26.12  DPM financial requirements
26.13  Floor broker financial requirements
26.14  Exchange authorization required
------------------------------------------------------------------------
    Chapter XXVII--Buy-Write Option Unitary Derivatives (``BOUNDs'')
------------------------------------------------------------------------
27.1  Definitions
27.2  Rights and obligations of holders and sellers
27.3  BOUND contracts to be traded
27.4  Restrictions on transactions in BOUNDs
27.5  BOUND expiration schedule, series of BOUNDs
 open for trading, strike prices
27.6  Application of certain Rules to BOUNDs
27.7  Position limits
27.8  Reporting of BOUNDs positions and related
 Rules
27.9  Delivery and payment
27.10  Margin
------------------------------------------------------------------------

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. 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 proposed rule change sets forth rules governing the Exchange's 
screen-based trading (``SBT'') system (``SBT System'' or ``System''), 
known as CBOEdirect. CBOEdirect will supplement the Exchange's floor-
based open outcry auction market. Although it has been designed to be 
able to trade options during the regular trading hours or during 
extended trading hours, CBOEdirect initially will be used to trade only 
during hours when the open outcry auction market is not open.\4\ CBOE's 
existing rules would govern trading on the SBT System, except as those 
rules are superseded or supplemented by the rules in Chapters XL 
through XLIX. CBOE is presently proposing to adopt SBT rules in 
Chapters XL through XLVI and would reserve Chapters XLVII through XLIX 
for future SBT rules, if it became necessary to adopt additional rules.
---------------------------------------------------------------------------

    \4\ On September 7, 2001, CBOE submitted to the Commission a 
Form PILOT with respect to CBOEdirect, pursuant to Rule 19b-5 under 
the Act, 17 CFR 240.19b-5. A self-regulatory organization may 
commence operation of a pilot trading system 20 days after filing a 
Form PILOT. See 17 CFR 240.19b-5(e)(1). CBOE commenced operation of 
a SBT System on October 26, 2001. Rule 19b-5 requires a self-
regulatory organization, within two years of commencing operations 
of the pilot trading system, to file a proposed rule change--
pursuant to Section 19(b)(2) of the Act, 15 U.S.C. 78s(b)(2)--to 
obtain permanent authority to operate that system. See 17 CFR 
240.19b-5(f)(1). The present filing (SR-CBOE-00-55) was submitted 
pursuant to the requirement.
---------------------------------------------------------------------------

a. Basics of the SBT System
    Unlike with the open outcry auction market, execution priority of 
orders in CBOEdirect would not necessarily depend on originator type 
(e.g., market maker, customer, firm, or broker-dealer). As discussed 
further below, orders would be executed on the System using either a 
strict price/time priority or a price/time pro rata allocation 
procedure. However, the Exchange's SBT Trading Committee would have the 
authority to overlay customer priority on either of these two 
allocation procedures. In addition, the SBT Trading Committee would 
have authority to allocate a trade participation right to an SBT 
Designated Primary Market Maker (``SBT DPM'') or an SBT Lead Market 
Maker (``SBT LMM'').\5\ The initial SBT DPM/LMM participation 
entitlement percentage would be 30%, which CBOE would indicate in a 
circular distributed to the Exchange's membership. It is possible that 
the SBT Trading Committee might provide for different priority methods 
for different option classes at the same time. By doing so, the SBT 
Trading Committee could tailor the particular priority method to the 
particular option class (since the trading in different classes can 
vary), meet changes in priority structures put in place at competing 
exchanges, and experiment to determine which priority methods attract 
the most customer demand. CBOE has represented that, in any event, it 
would publicize the type of priority structure that applied to each 
particular option class so that all market participants were able to 
know what would be the relative priority of their orders for any 
particular option class.
---------------------------------------------------------------------------

    \5\ Although the maximum guaranteed percentage entitlement for 
an SBT DPM/LMM would be 40%, the participation of an SBT DPM/LMM on 
any particular trade may be greater if the applicable allocation and 
priority rules so provide.
---------------------------------------------------------------------------

    As currently designed, CBOEdirect would disclose neither the source 
of an order nor the contra-parties to a trade, except as identities of 
the trade participants might be revealed in connection with trade 
nullification procedures set forth in the proposed rules.
    A number of SBT Standard Market Makers would be assigned to each 
class traded on CBOEdirect. An SBT DPM also might be assigned to a 
class traded on the System and, if one were so assigned, would be 
obligated to provide opening quotes for all the series in its assigned 
classes. If no SBT DPM had been assigned to a particular trading class, 
the SBT Standard Market Makers would be obligated to provide opening 
quotes.\6\ In addition, SBT Market Makers (either SBT Standard Market 
Makers, SBT DPMs, or SBT LMMs) assigned to a class would be obligated 
to respond to a certain minimum percentage of request for quotes 
(``RFQs'') in their assigned classes.\7\ If

[[Page 31023]]

CBOEdirect were used during extended trading hours when there was 
little liquidity in the underlying market, the appropriate Market 
Performance Committee or two Trading Officials could exempt the market 
makers from providing opening quotes or responding to RFQs. SBT 
Standard Market Makers, SBT DPMs, and SBT LMMs would have other 
obligations as further described below and in the proposed rules.
---------------------------------------------------------------------------

    \6\ The appropriate Market Performance Committee also might 
appoint an SBT LMM on a rotating basis which, like an SBT DPM, would 
have an obligation to provide opening quotes and to respond to RFQs 
at a higher rate than standard SBT Market Makers. Also an SBT LMM, 
like an SBT DPM, might have a guaranteed participation right for 
trades executed at its previously established quote. Initially, the 
guaranteed participation rate for SBT LMMs would be 30%. CBOE has 
stated that it would issue a circular to its membership indicating 
this participation rate. SBT LMMs also might have a continuous 
quoting obligation.
    \7\ Under the present open outcry system, a market maker is 
obligated, among other things, to compete with other market to 
improve markets in all series of option classes at the station where 
the market maker is present; to make markers which, absent changed 
market conditions, will be honored to a reasonable number of 
contracts in all series of option classes at the station where the 
market maker is present; and to update quotations in response to 
changed market conditions in all series of option classes at the 
station where the market maker is present. As a practical, however, 
quotes in all of the thousands of series trades at one station are 
provided by an autoquote system, while the market makers will 
verbally update and improve a number of the series on a periodic 
basis. It is possible for a market maker in the open outcry system, 
however, to avoid actively updating quotes, although CBOE does have 
a number of means to monitor for compliance. It would not be 
possible for an SBT Market Maker to avoid its obligations, as the 
System would monitor compliance and keep track of every response an 
SBT Market Maker had submitted.
    CBOE anticipates that a number of SBT Market Makers would choose 
to provide continuous quotes, although the Exchange would not 
require them to do so. CBOE believes, however, that the quotes 
stream that would be produced if all market makers were required to 
provide continuous quotes for such a large number of series as might 
be listed on the System would overwhelm the quote dissemination 
systems currently in place at the Options Price Reporting Authority 
(``OPRA'') and a third-party quote vendors. CBOE doubts whether 
there would be any benefit from imposing such a requirement.
---------------------------------------------------------------------------

    Only SBT Market Makers (including SBT DPMs/LMMs) could enter 
quotes. Order providers (SBT Brokers and Proprietary Traders) would be 
prohibited from entering limit orders in the same options series, for 
the accounts or accounts of the same or related beneficial owners, in 
such a manner that the order provider or the beneficial owner(s) 
effectively would be operating as a market maker by holding itself out 
as willing to buy and sell option contracts on a regular or continuous 
basis. Market maker quotes would be entered as two simultaneous orders 
(a buy order and a sell order) with any width. For a quote to count 
towards an SBT Market Maker's quote obligations (i.e., the RFQ response 
requirement or continuous quote requirement), a quote would have to be 
no wider than a prescribed width and for an amount equal to or greater 
than some prescribed size. All market participants, including SBT 
Market Makers, could submit regular orders, for any class.
    CBOEdirect would accept market maker, firm, and broker-dealer 
orders in addition to public customer orders. Spread orders and certain 
contingency orders also would be accepted.
    Customer, firm, and broker-dealer orders could be submitted through 
an SBT workstation, the current wire order facility (used to send 
orders to the Exchange's open outcry auction market), or through a 
computer-to-computer link using CBOE's new application program 
interface (``API''). CBOE has stated that it might limit the number of 
market makers that could access CBOEdirect through an API in order to 
protect the integrity of the System. In addition, CBOE has stated that 
it might impose restrictions on the use of a computer connected through 
an API if it believed such restrictions were necessary to ensure the 
proper performance of the System. CBOE has represented that these 
limitations would be only for the purpose of protecting the integrity 
of the System and would not be used in a discriminatory or arbitrary 
fashion.
    Market maker orders and quotes could be submitted through an SBT 
workstation or the API.
    Book depth and other market information would be available to all 
participants, although fees might be charged for access to certain of 
the information. CBOE has represented that these fees would be charged 
in a non-discriminatory manner and set at a level to ensure that the 
performance of the System did not become degraded.
    Both opening and closing procedures would be handled automatically. 
SBT Market Makers assigned to a class would participate in the opening 
trade on an individual basis by providing their own quotes. SBT DPMs 
would be obligated to provide their opening quotes. The System would 
determine automatically the opening price that would clear the market 
and trade the maximum quantity at the open.\8\ Spread orders and 
contingency orders (except for ``opening only'' orders) would not 
participate in the opening trade or in the determination of the opening 
price.\9\ CBOE believes that the exclusion of these order types from 
the opening process would not only simplify the process for completing 
the opening, but also be consistent with the operation of the System 
which treats spread orders separately from other orders. Market 
participants wishing to have their spread orders represented in the 
opening could separate the order into distinct legs which could be 
represented in the opening. Likewise, market participants wishing to 
trade a contingency order could choose not to impose the contingency 
until after the opening if they wanted to attempt to participate in the 
opening.
---------------------------------------------------------------------------

    \8\ Today in the open outcry system, CBOE employs a Rapid 
Opening System (``ROS'') to open some classes in a quick and 
automated fashion.
    \9\ The Commission notes that proposed CBOE Rule 42.3, Opening 
and Closing Rotation Procedures, is not consistent with its position 
in order approving CBOE's Rapid Opening System (``ROS'') pilot 
program that non-bookable orders should be incorporated into ROS. 
See Securities Exchange Act Release No. 41033 (February 9, 1999), 64 
FR 8156 (February 18, 1999).
---------------------------------------------------------------------------

    In CBOEdirect, the series of a class would not have to open all at 
the same time. Those that could open would be opened and those that 
could not open because of some reason (e.g., market order imbalance) 
would cycle through the pre-opening and opening rotation procedures 
until they could open.
    Unlike with the open outcry system, a CBOE autoquote facility would 
not be available to SBT Market Makers. However, CBOE anticipates that 
SBT Market Makers might use their proprietary autoquote systems to 
submit quotes through the API.
    SBT Traders could trade from their offices or from any location 
where they had a workstation and communication link to the Exchange. An 
SBT Trader would have to be assigned a membership in order to trade on 
the System. However, current membership rules, which are applicable to 
the SBT System, provide for a different trader to use the regular 
trader's seat in certain situations. SBT Traders could avail themselves 
of current CBOE Rule 3.8, which allows a nominee of a firm to transfer 
onto a seat that is generally used by another nominee of the same firm. 
A firm would thereby be permitted to allow one nominee to trade on the 
seat during regular trading hours and a different nominee to trade on 
the seat during a CBOEdirect extended trading hour session.
    Other users of the System--besides SBT Market Makers and SBT 
Brokers--would include Proprietary Traders, Clearing Firm Users, and 
SBT System Operators/Administrators. Proprietary Traders would be 
members who entered orders as principal for non-market-maker 
proprietary accounts. Clearing Firm Users would be members who 
monitored and regulated the activities of SBT Traders trading through 
the clearing firm of the Clearing Firm User. SBT System Operators/
Administrators would be Exchange employees who supported the operation 
of the System.

Extended Trading Hour Session

    Initially, CBOEdirect is intended to be used to trade options only 
during one or more extended trading hour (``ETH'') sessions and not 
during the regular trading hour (``RTH'') session during which options 
are currently traded on the Exchange. At this time, CBOE

[[Page 31024]]

intends to trade a number of index option products during a morning 
session from 7 a.m. to 8:15 a.m. Central Time, before the normal 
opening for the open outcry auction market at 8:30 a.m. CBOE has not 
finalized the products that will be traded on the System, but as of 
April 24, 2002, the only products trading on CBOEdirect were all series 
(except LEAPS) of options on the Standard & Poor's 100 index (``OEX''), 
the Russell 2000 (``RUT''), and the Dow Jones Industrial Average 
(``DJX'').\10\ Of course, the trading hours during which the System is 
used and the products traded on the System could change at any time 
based upon the competitive landscape, the interests of the Exchange's 
membership, and customer demand. At this time, CBOE intends to provide 
OPRA reports of quote and last sale during the ETH session(s) different 
from those sent during the RTH session so that the reports could be 
easily distinguished. The trading symbols for the classes would, 
however, be identical during the RTH and ETH sessions, and the 
contracts traded in both sessions would be fungible.
---------------------------------------------------------------------------

    \10\ Telephone conversation between Angelo Evangelou, Legal 
Division, CBOE, and Nancy Sanow, Division, Commission, on April 24, 
2001.
---------------------------------------------------------------------------

    Initially, the System would not provide for the passing of orders 
between the ETH session and the RTH session. ``Time in force'' 
indicators would be used on orders routed to the Exchange to indicate 
whether the order was to be represented in the ETH session or the RTH 
session. Eventually, the System would allow for a variety of ``time in 
force'' codes that would provide for the order to be represented in 
more than one or all of the sessions of a current trading day. As a 
protection to customers and firms, CBOE would limit the time frames 
during which order types could be submitted to the Exchange, such that 
any order submitted would have to be designated for the current or next 
trading session of the current trading day.
    Initially, during the ETH period, CBOE expects to require SBT DPMs/
LMMs to continuously quote all series in the front two months and all 
series that are no more than 5% in-the-money or out-of-the-money. For 
those series that would not be continuously quoted, CBOE expects to 
impose an 85% RFQ response rate on SBT DPMs/LMMs and a 10% RFQ response 
rate on standard SBT Market Makers. The RFQ response rate would be 
calculated over a monthly period.

Definitions and Application of Other Rules

    The Exchange has proposed a definitional rule, CBOE Rule 40.1, to 
define those terms that are unique to the SBT System.
     ``Screen Based Trading System'' or ``SBT System'' would be 
defined as the electronic system administered by the Exchange that 
would perform the functions set out in Exchange rules including 
controlling, monitoring, and recording trading by members through SBT 
workstations and trading between members.
     ``Application Program Interface'' or ``API'' would mean 
the computer program that would allow SBT Traders on their own 
computers or on CBOE- or vendor-supplied workstations to interface with 
the SBT System.
     ``SBT Book'' would mean all unexecuted orders, other than 
spread orders, currently held by the SBT System.
     ``SBT Spread Book'' would mean all unexecuted spread 
orders currently held by the SBT System.
     ``SBT workstation'' would mean a computer workstation 
connected to the SBT System for the purposes of trading pursuant to the 
rules in proposed Chapters XL through XLIX.
     ``Trading Official'' would mean an Exchange employee or 
member who is granted certain duties under these rules to take actions 
affecting either the operation of the SBT System or the 
responsibilities of SBT Traders.\11\
---------------------------------------------------------------------------

    \11\ The Commission notes that there are several instances in 
the proposed rules where ``two Trading Officials'' or ``Trading 
Officials'' or ``Exchange Officials'' would be able to take various 
actions. The Commission believes that, in certain proposed rules, 
the discretion afforded to ``Trading Officials'' or ``Exchange 
Officials'' may be overbroad.
---------------------------------------------------------------------------

     ``SBT Trader'' would mean an individual or organization 
that had the right to trade on the SBT System.
     ``Market Turner'' would mean an SBT Trader who was the 
first SBT Trader to enter an order (quote) at a better price than the 
previous best book price prior to the trading of an order, and the 
order (quote) was continuously in the market until the particular order 
traded.
     ``Legal Width Market'' would mean a bid and offer that was 
at or within the prescribed width as set forth in proposed CBOE Rule 
44.4. For most purposes under these rules, a legal width market could 
be established by a bid from one SBT Trader and an offer from a 
different SBT Trader.
    The Exchange also has proposed CBOE Rule 40.2, which would specify 
that, to the extent that existing Chapters I through XXVII of the CBOE 
rules are applicable to trading on the SBT System (as indicated by the 
context or by Appendix A to the SBT rules), the terms used in Chapters 
I through XXVII should be read to have the following meanings where 
appropriate:
     ``Floor'' should be read to mean SBT System;
     ``Floor Official'' should be read to mean Trading 
Official;
     ``Appropriate Floor Procedure Committee'' should be read 
to mean ``appropriate SBT Trading Committee;''
     ``Floor Broker'' should be read to mean ``SBT Broker'' 
where appropriate;
     ``Market-Maker'' should be read to mean ``SBT Standard 
Market-Maker,'' ``SBT LMM,'' or ``SBT DPM,'' as appropriate; and
     References in rules to ``the Exchange'' should be read to 
include the SBT System, where appropriate.
    Any Exchange member who chose to participate on the SBT System 
could register with the Membership Committee as an SBT Market Maker 
(who could then act as an SBT Standard Market Maker, SBT LMM, or SBT 
DPM), SBT Broker, or Proprietary Trader. The Membership Committee would 
be responsible for approving applications of Exchange members as an SBT 
Market Maker, SBT Broker, or Proprietary Trader for the SBT System.
    Once the SBT System had been enabled to recognize Replacement 
Traders, individual SBT Market Makers could nominate a Replacement 
Trader who would have to be qualified and registered with the Exchange 
as such. The Membership Committee would be responsible for qualifying 
and approving Replacement Traders. Replacement Traders for a nominee of 
a member firm would have to be nominees of the same firm or have their 
memberships registered for the same firm. When an SBT Market Maker 
logged off the SBT System, it could first choose to transfer its 
position to a Replacement Trader. Any quote transferred in that manner 
would retain its priority.

Access

    For purposes of the SBT System that would be used during an ETH 
session, a member could use its membership to trade during the ETH 
session. As mentioned previously, a member organization also could have 
a different nominee use its membership to trade on the SBT System, 
pursuant to existing CBOE Rule 3.8.

Types of SBT System Users

    As mentioned above, there would be a number of types of users of 
SBT workstations: SBT Market Makers

[[Page 31025]]

(including Standard SBT Market Makers, SBT LMMs, and SBT DPMs); 
Proprietary Traders; Clearing Firm Users; and SBT System Operators/
Administrators.
    Market makers would operate the SBT workstation for the following 
functions:
     Enter, cancel, cancel/replace, and maintain two-sided 
quotes;
     Enter, cancel, cancel/replace, and maintain orders;
     Hit bids and take offers;
     Submit RFQs;
     Respond to RFQs;
     Communicate with contra-parties for nullifying trades; and
     Set up defaults or preferences.
    SBT Brokers and Proprietary Traders would operate the SBT 
workstations for the following functions:
     Enter, cancel, cancel/replace, and maintain orders;
     Hit bids and take offers;
     Submit RFQs;
     Enter cross-notification and cross-execution orders;
     Communicate with contra-parties for nullifying trades; and
     Set up defaults or preferences.
    Orders from SBT Brokers and Proprietary Traders could be entered 
through the Exchange's existing member firm front-end system. CBOE 
estimates that, initially, 80% of retail orders for SBT products would 
continue to be submitted as wire orders via ORS. The remaining 20%--
composed of contingency orders, spread orders, and orders that would 
have to be ``worked''--are currently transmitted to the floor by phone. 
For SBT products, this 20% would be submitted via the SBT workstations 
or through the API.
    Clearing Firm Users would regulate the activities of SBT Market 
Makers that cleared through them. They would use the SBT workstation 
for the following functions:
     Set the volume limit of market maker orders, by class; and
     Force the logout of a market maker.
    SBT System Operators/Administrators would operate workstations 
located at the Exchange or elsewhere for the following support 
functions:
     Start/stop the SBT System;
     Start/stop trading by class, by underlying security, or 
for the entire market;
     Add/change/delete trader IDs to the System;
     Add/change/delete products;
     Change market status such as open, closed, fast market, 
halt, etc. by class, by underlying security, or for the entire market;
     Determine the operating status of any workstation in the 
network;
     Send automated broadcasts of canned administrative 
messages to e-mail, fax, voice recording, trading groups, CBOE webpage, 
and SBT blackboard;
     Send text message to a trader or group of traders;
     Maintain class groups and market maker assignments to 
classes;
     Maintain market maker profiles which will identify the 
accounts where trades will settle;
     Maintain relationships between brokers and their executing 
firms/give-up firms;
     Monitor the log-in status of traders by class;
     Display operating status of various SBT System services;
     Display by class assigned and logged-in market makers;
     Display un-responded RFQs, including source of the RFQ;
     Display a trader's preferences;
     Enter, update, and display a market maker's appointments;
     Display a given terminal's activity for troubleshooting;
     Display trade log by trader ID of today's trades;
     Exercise full SBT workstation functionality by using a 
test product;
     Display a screen from a particular trader's point of view;
     Bust a trade;
     Force the logout of a market maker in response to a 
request from a clearing firm;
     Change Exchange-wide trading parameters; and
     Any other function provided for by the Exchange.
b. States of Operation
    During the day, a particular class may be in one of the following 
states of operation: Pre-opening, Opening, Trading, Halted, and Closed.
    Pre-opening. At this state, the System would accept quotes and 
orders, except time contingency and crossing orders, but no trading 
would take place. The System would provide market data, including data 
on any resting orders from the previous day and orders submitted before 
the opening, which could be viewed by any SBT Trader who subscribed to 
the data for that particular class.
    Opening. The opening would be conducted using a ``maximum contract 
volume traded'' procedure. Under this procedure, when the primary 
market disseminated the underlying security's opening trade or opening 
bid and ask, the class would go into a second Pre-opening phase.\12\ 
The System would send out an Opening Notice (i.e., an RFQ) to SBT 
Market Makers that were assigned to that class to solicit their opening 
quotes.
---------------------------------------------------------------------------

    \12\ CBOE anticipates that, with index options trading during 
the ETH sessions, the Exchange's Help Desk would declare that the 
particular class was open at some point after the opening time since 
there would not be an underlying security price disseminated.
---------------------------------------------------------------------------

    The System would continue to accept quotes and orders, except time 
contingency and crossing orders, during this state. At the end of this 
Pre-opening time period, the System would go into an Opening where it 
would establish an opening price for each series, complete the opening 
trade, if any, and then change the state of the class to Trading.
    Trading. During this state, the series would trade freely. All 
order types and quotes would be accepted during the Trading state, 
except for Opening-only contingency orders.
    Halted. A particular class or all of the classes traded on 
CBOEdirect could be placed in a Halted state for various reasons. The 
most common reason would be that the primary exchange had halted 
trading of the underlying security, or no underlying security prices or 
quotes were being received by the System. The System would send status 
alerts to OPRA for a product that had been halted. A product would have 
to go through the Pre-opening and Opening rotation procedures before it 
reverted to Trading after being Halted. When the System is operated 
during an ETH session, there might not be a primary market trading the 
underlying security. In such cases, the System might or might not 
automatically declare a trading halt if the underlying security had 
been halted on one or more of the markets trading the underlying 
security. The appropriate SBT Trading Committee would determine in 
advance from time to time whether to have the System automatically halt 
trading on the options if trading in the underlying had been halted in 
a market trading the underlying during an ETH session.
    Closed. The System would change the state to Closed at a pre-
determined time. Trading would be stopped but the System would continue 
to accept certain order types to allow traders to maintain their 
orders. At some designated time, the System would stop accepting orders 
and would enter into end-of-session procedures such as the purging of 
expiring orders (e.g., day orders, if the System was used during the 
traditional trading hours), and reporting of Nothing Done order status 
to member firms.

Extended Trading Hours

    During extended trading hours (i.e., that period of time outside of 
the normal

[[Page 31026]]

trading hours, when CBOEdirect would be used to trade options), the 
same states of operation would be employed. Initially, the System would 
accept only limit orders during the ETH period and would not accept 
market orders or certain contingency orders. The obligations of SBT 
DPMs/LMMs and Standard SBT Market Makers might be reduced during the 
ETH period because of the possibility that liquidity in the underlying 
securities might be severely reduced during this period of time.

Unusual Market Conditions

    CBOEdirect would be capable of declaring both fast markets and 
trading halts upon the occurrence of certain events, as detailed in 
proposed CBOE Rule 43.4. Additionally, proposed CBOE Rule 43.4 would 
supplement the current unusual market condition rule, CBOE Rule 
6.6.\13\ Proposed CBOE Rule 43.4 would describe the reasons why a 
Trading Official may determine to declare either a fast market or a 
trading halt. As with existing CBOE Rule 6.6, once a fast market has 
been declared, Trading Officials could take such actions as they deemed 
necessary to maintain a fair and orderly market. Upon the declaration 
of a fast market, Trading Officials could widen permissible bid/ask 
spreads by which a market maker must quote in order to receive credit 
for meeting its quote obligations and the suspend the firm quote 
obligations pursuant to existing CBOE Rule 8.51.
---------------------------------------------------------------------------

    \13\ The Commission notes that a responsible broker or dealer is 
relieved of its firm quote obligations under CBOE Rule 8.51 as well 
as Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1 (``Firm Quote 
Rule''), if there are unusual market conditions such that the 
exchange is incapable of collecting, processing, and making 
available to quotation vendors the data required to be available 
under the Firm Quote Rule in a manner that accurately reflects the 
current state of the market on such exchange.
---------------------------------------------------------------------------

c. Trade Allocation
    Orders would be filled in CBOEdirect according to the market order 
processing and limit order processing rules described below. The 
appropriate SBT Trading Committee would have the authority to apply one 
of various types of trade allocation methodologies. The System would 
send fill reports for executed orders to the SBT workstations for 
display to the traders or to ORS for sending fill reports for wire 
orders. Executed orders would be sent to the Exchange's Trade Match 
System as a matched trade.
    There would be two basic types of trade allocation methodologies: 
price-time and price-time pro rata. On top of these may be overlaid 
optional priorities for public customers, the Market Turner, and/or the 
SBT DPM/LMM.\14\ The appropriate SBT Trading Committee would apply, for 
each class of options, one of the rules of trading priority discussed 
below. CBOE has stated that it would issue a Regulatory Circular 
periodically that would specify which priority rules would govern which 
classes of options any time the appropriate committee changed the 
priority.
---------------------------------------------------------------------------

    \14\ The Commission notes that, under the proposed CBOEdirect 
rules, public customers may not necessarily receive the highest 
allocation priority, depending on the priority structure authorized 
by the appropriate SBT Trading Committee. The Commission requests 
commenters views regarding the proposed rules that would govern 
allocation priority for CBOEdirect transactions.
---------------------------------------------------------------------------

    Price-Time Priority. Under this method, resting orders in the SBT 
Book would be prioritized according to price and time. If two or more 
orders were at the best price, priority among these orders would be 
afforded in the order in which they were received by the System.
    Price-Time Pro Rata Allocation.\15\ Under this allocation 
methodology, resting orders in the SBT Book would be prioritized 
according to price. If there were two or more orders at the best price, 
trades would be allocated proportionally according to size (in pro rata 
fashion). The executable quantity would be allocated to the nearest 
whole number, with fractions \1/2\ or greater rounded up and fractions 
less than \1/2\ rounded down. If there were two market participants 
that were both entitled to an additional \1/2\ contract and there were 
only one contract remaining to be distributed, the additional contract 
would be distributed to the market participant whose quote or order had 
time priority.
---------------------------------------------------------------------------

    \15\ In the draft notice prepared by CBOE, the ``Price-Time Pro 
Rata'' allocation method is sometimes referred to as ``Combined 
Price-Time and Size Priority.'' For the sake of clarity, only the 
term ``Price-Time Pro Rata'' is being used in this notice.
---------------------------------------------------------------------------

    Additional Priority Overlays. In addition to the basic allocation 
methodologies set forth above, the appropriate SBT Trading Committee 
could determine to apply, on a class-by-class basis, any or all of the 
following designated market participant overlay priorities, in a 
sequence determined by the appropriate SBT Trading Committee.
    (1) Public Customer. If this priority overlay were in effect and no 
other priority overlays were in effect, the highest bid and lowest 
offer would have priority, except that a public customer order would 
have priority over a non-public customer order at the same price. If 
other priority overlays were also in effect, priority would be 
established in the sequence designated by the appropriate SBT Trading 
Committee. In either case, if there were two or more public customer 
orders for the same options series at the same price, priority would be 
afforded to such public customer orders in the sequence in which they 
had been received by the System, even if the price-time pro rata 
allocation method were the chosen allocation method.
    (2) Market Turner. If this priority overlay were in effect and no 
other priority overlays were in effect, the Market Turner would have 
priority at the highest bid or lowest offer that it had established. If 
other priority overlays were also in effect, priority would be 
established in the sequence designated by the appropriate SBT Trading 
Committee. In either case, the Market Turner priority at a given price 
would remain with the order once it had been earned. For example, if 
the market moved in the same direction as the direction in which the 
order from the Marker Turner had moved the market and then the market 
moved back to the Market Turner's original price, the Market Turner 
would retain priority at the original price.
    (3) Trade Participation Right (``TPR''). SBT DPMs/LMMs could be 
granted trade participation rights that would provide for priority over 
non-public customer and/or customer orders up to the applicable 
participation right percentage designated pursuant to the provisions of 
proposed Chapter XLIV. If other priority overlays were also in effect, 
priority would be established in the sequence designated by the 
appropriate SBT Trading Committee. In allocating the participation 
right, all of the following would apply:
    (i) To be entitled to its participation right, the order and/or 
quote of the SBT DPM/LMM would have to be at the best price.
    (ii) An SBT DPM/LMM could not be allocated a total quantity greater 
than the quantity that the SBT DPM/LMM was quoting (including orders 
not part of quotes) at that price. Additionally, an SBT DPM/LMM could 
not be allocated a total quantity that represented a greater percentage 
than the SBT DPM's/LMM's percentage of the total size \16\ at

[[Page 31027]]

the best price before the participation right had been applied.
    (iii) If the trade participation right priority and the Market 
Turner priority were both in effect and the SBT DPM/LMM were the Market 
Turner, the Market Turner priority would not be applicable.
    (iv) In establishing the counterparties to a particular trade, the 
SBT DPM/LMM participation right would first be counted against the 
highest priority bids or offers of the SBT DPM/LMM.
    Contingency Orders. Contingency orders would be placed last in 
priority order, regardless of when they were entered into CBOEdirect or 
which allocation method was in place. A contingency order that was 
entered before a limit order for the same series at the same price 
would be treated as if it were entered after the limit order. If 
customer priority were afforded to a particular option class, customer 
contingency orders would have priority over non-public customer 
contingency orders.
---------------------------------------------------------------------------

    \16\ ``Total size'' in this context means the quantity of 
contracts that would remain after the interest of any participant 
with a higher priority had been satisfied. Telephone conversation 
between Nancy Sanow, Ira Brandriss, and Michael Gaw, Division, 
Commission, and Angelo Evangelou, Legal Division, CBOE, on April 5, 
2002 (``Telephone conversation of April 5, 2002'').
---------------------------------------------------------------------------

    Spread Orders. Spread orders would not be afforded priority 
according to proposed CBOE Rule 43.2, but would be handled as provided 
in proposed CBOE Rule 43.8.
    Below are examples of how trades would be allocated under the 
different priority allocation methods.

Price-Time Allocation

    Example 1. The SBT DPM's TPR share is 30%. In this example the 
allocation gives the DPM its TPR share only. Assume that, within the 
price-time allocation procedure, customer priority is specified as 
first and DPM as second. Assume that there is an incoming market 
order to sell 20.

    Book's Resting Bids:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       DPM share       DPM       Remaining
                Time                          Category          Fill seq.     Bid qty.      Fills       n (30%)     allocation      qty.        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         20
3...................................  Customer...............            1            5            5  ...........  ...........           15  ...........
8...................................  Customer...............            2            1            1  ...........  ...........           14  ...........
9...................................  Customer...............            3            4            4  ...........  ...........           10  ...........
                                                               ...........  ...........  ...........          3.0            3            7            1
1...................................  MM1....................            4           10            7  ...........  ...........            0            2
2...................................  DPM bid1...............            5           10            3  ...........           -3  ...........            3
4...................................  B/D1...................            6           10  ...........  ...........  ...........  ...........  ...........
5...................................  DPM bid2...............            7           50  ...........  ...........  ...........  ...........  ...........
6...................................  MM2....................            8           10  ...........  ...........  ...........  ...........  ...........
7...................................  MM3....................            9           10  ...........  ...........  ...........  ...........  ...........
                                                                           --------------
                                          Total..............  ...........          110  ...........  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

Notes

    1. The DPM TPR share is 30%. The DPM is allocated 3 contracts, 
leaving 7 for price-time allocation.
    2. The first order, MM1, is partially filled with 7, leaving 0.
    3. The DPMbid1 order is partially filled with 3 from the TPR 
allocation.

    Example 2. The SBT DPM's TPR share is 30%. In this example, the 
allocation gives the DPM its TPR share plus a partial fill of its 
order in time sequence. Assume that, within the price-time 
allocation procedure, customer priority is specified as first and 
DPM priority as second. Assume that there is an incoming market 
order to sell 80.

    Book's Resting Bids:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       DPM share       DPM       Remaining
                Time                          Category          Fill seq.     Bid qty.      Fills       n (30%)     allocation      qty.        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         80
3...................................  Customer...............            1            5            5  ...........  ...........           75  ...........
8...................................  Customer...............            2            1            1  ...........  ...........           74  ...........
9...................................  Customer...............            3            4            4  ...........  ...........           70  ...........
                                                               ...........  ...........  ...........         21.0           21           49            1
1...................................  MM1....................            4           10           10  ...........  ...........           39            2
2...................................  DPM bid1...............            5           10           10  ...........          -10           39            3
4...................................  B/D1...................            6           10           10  ...........  ...........           29            4
5...................................  MM2....................            8           10           10  ...........  ...........           19            5
6...................................  MM3....................            9           10           10  ...........  ...........            9            6
7...................................  DPM bid2...............            7           50           20  ...........          -11            0            7
--------------------------------------------------------------------------------------------------------------------------------------------------------

Notes

    1. The DPM's TPR share is 30%. The DPM is allocated 21 contracts, 
leaving 49 for price-time allocation.
    2. The first non-customer order, MM1, is filled with 10, leaving 
39.
    3. The DPMbid1 order has been fully filled with 10 from the TPR 
allocation of 21. The quantity for price-time allocation remains 
unchanged at 39.
    4. The B/D1 order is filled with 10, leaving 29.
    5. The MM2 order is filled with 10, leaving 19.
    6. The MM3 order is filled with 10, leaving 9.
    7. The DPMbid2 order is partially filled with 20, which comes from 
the TPR remainder of 11 plus the remainder of 9.

    Example 3. The SBT DPM's TPR share is 30%. In this example, the 
allocation gives the DPM its TPR share only. Assume that, within the 
price-time allocation procedure, customer priority is specified as 
first and DPM priority as second. Assume that there is an incoming 
market order to sell 80.
DPM share = 30%  x  70 = 21.0

    Book's Resting Bids:

[[Page 31028]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       DPM share       DPM       Remaining
                Time                          Category          Fill seq.     Bid qty.      Fills       n (30%)     allocation      qty.        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            80
3...................................  Customer...............            1            5            5  ...........  ...........           75  ...........
8...................................  Customer...............            2            1            1  ...........  ...........           74
9...................................  Customer...............            3            4            4  ...........  ...........           70
                                                                                                             21.0           21           49            1
1...................................  MM1....................            4           10           10  ...........  ...........           39            2
2...................................  DPM bid1...............            5           10           10  ...........          -10           39            3
4...................................  B/D1...................            6          100           39  ...........  ...........            0            4
5...................................  DPM bid2...............            7           50           11  ...........          -11            0            5
6...................................  MM2....................            8          100  ...........  ...........  ...........            0  ...........
7...................................  MM3....................            9           10  ...........  ...........            0
                                                                           --------------
                                          Total..............  ...........          290  ...........  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

Notes

    1. The DPM TPR share is 30%. The DPM is allocated 21 contracts, 
leaving 49 for price-time allocation.
    2. The first order, MM1, is filled with 10, leaving 39.
    3. The DPM bid1 order is fully filled with 10 from the TPR 
allocation of 21. The quantity for price-time allocation is 39.
    4. The B/D1 order is filled partially with 39, leaving 0.
    5. The DPMbid2 order is partially filled with 11, which comes from 
the TPR remainder.

Price-Time Pro Rata Allocation

    The SBT Book would store the orders from the best price to the 
worst. At each price level, the orders would be sorted in time 
sequence. Trades would be allocated in a manner that provided 
incentives to create deeper and tighter markets.
    As discussed above, under the price-time pro rata allocation 
procedure, three optional priorities--customer priority, SBT DPM/LMM 
trade participation right, and Market Turner--could be specified, as 
well as their priority with respect to each other.
     Customer Priority. Customer priority, if it were provided, 
is recommended to be absolute. If customer priority were granted, 
customer orders would be filled ahead of any other order. Within the 
group of customer orders, the orders would be prioritized by time.
     Market Turner. The order that improves the market would 
earn Market Turner priority.
     Trade Participation Rights. To receive its TPR share, the 
SBT DPM/LMM would have to have a quote and/or order at the best price. 
The TPR would be calculated as a percentage--a minimum of n (30%)--of 
the remaining quantity after all higher priority orders (e.g., 
customer) had been filled completely. The minimum TPR quantity would be 
allocated to the SBT DPM/LMM up to its size. If there were a remaining 
executable quantity, orders of lower priority than the SBT DPM/LMM 
(e.g., Market Turner) would be filled completely. If there were 
remaining executable quantity, the remaining quote and/or order 
quantities of the SBT DPM/LMM, if any, would participate in the pro 
rata allocation of the remainder to the orders at the best price. 
However, the maximum participation quantity of the SBT DPM/LMM would be 
limited to its original pool share of the quantity before the minimum 
TPR quantity was calculated. In addition, if the Market Turner were an 
SBT DPM/LMM, that priority would be ignored. This algorithm is 
illustrated in examples 1 to 6 below.
    Price-Time Pro Rata Example 1.  Assume that priority is (1) 
customer, (2) DPM, (3) Market Turner. No customer orders are 
included to simplify the example. In this example, the Market Turner 
and the DPM are both filled, with the DPM getting less than its 
maximum possible allocation (i.e., original pool percentage share). 
Note that the DPM has two orders. For this allocation method, the 
DPM size is aggregated and filled after the Market Turner is filled 
because the DPM gets its fill from a two-step allocation: First, 
from its TPR share and, second, from the pro rata calculation.
    Assume there is an incoming market order to sell 20.

------------------------------------------------------------------------
                Time                        Category           Bid qty
------------------------------------------------------------------------
1..................................  MT....................           10
2..................................  DPM bid1..............           15
3..................................  B/D1..................           20
4..................................  DPM bid2..............           50
5..................................  MM2...................            5
6..................................  MM3...................           10
                                                            ------------
                                         Total.............           10
------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Bids for     Pro rata                  DPM 30%     Remaining
                    Category                       Fill seq.     Bid qty      P.R. #1      alloc #1      Fills        alloc.        qty         Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         20
                                                                                                                             6           14            1
MT..............................................            1           10  ...........  ...........           10  ...........            4            2
DPM size........................................            2           65           59            3            9           -6            1            3
B/D1............................................            3           20           20            1            1  ...........            0            4
MM2.............................................  ...........            5            5            0            0  ...........            0            4
MM3.............................................  ...........           10           10            0            0  ...........            0            4
                                                              -----------------------------------------------------
    Total.......................................  ...........          110           94            4           20  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

DPM Pool % = (65/110) = 59.1%
DPM Max. Share, P = (65/110)  x  20 = 11.8 or 12
DPM Min. Share, M = (0.3  x  20) = 6.0 or 6
Potential additional DPM share = 6

Notes

    1. The DPM pool share is 65/110 or 59.1%, or a maximum allocation 
of 12 contracts. The DPM minimum TPR share is 30% of 20, or 6 
contracts. The potential additional DPM share is (P-M), or (12-6) or 6 
contracts. To begin,

[[Page 31029]]

the DPM TPR share of 6 is allocated, leaving 14.
    2. The Market Turner is fully filled with 10, leaving 4.
    3. The pro rata distribution of the remainder of 4 is calculated, 
using the remaining order sizes in the pool. The DPM's pro rata share 
is 3. Since 3 + 6 (M) is not greater than P(12), the pro rata shares 
are allocated. The DPM is allocated its pro rata share of 3.
    4. B/D1 gets its pro rata share of 1. The other two orders get zero 
pro rata shares.

    Price-Time Pro Rata Example 2.  Assume that priority is (1) 
customer, (2) DPM, (3) Market Turner. No customer orders are 
included to simplify the example. In this example, the Market Turner 
and the DPM are both filled, with the DPM getting its maximum 
possible allocation (i.e., original pool percentage share). Note 
that the DPM has two orders. For this allocation method, the DPM 
size is aggregated and filled after the Market Turner is filled.
    Assume there is an incoming market order to sell 85.

------------------------------------------------------------------------
                Time                        Category           Bid qty.
------------------------------------------------------------------------
1..................................  MT....................           10
2..................................  DPM bid1..............           15
3..................................  B/D1..................           20
4..................................  DPM bid2..............           50
5..................................  MM2...................            5
6..................................  MM3...................           10
                                                            ------------
                                         Total.............          110
------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Bids for    Pro rata    Bids for    Pro rata                DPM  30%    Remaining
            Category               Fill seq.   Bid qty.     P.R. #1    alloc. #1    P.R. #2    alloc. #2     Fills      alloc.       qty.        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          85
                                                                                                                              26          59           1
MT..............................           1          10  ..........  ..........  ..........  ..........          10  ..........          49           2
DPM size........................           2          65          39          26                                  50         -26          25           3
B/D1............................           3          20          20          13          20          14          14  ..........          11           4
MM2.............................           3           5           5           3           5           4           4  ..........           7           4
MM3.............................           3          10          10           7          10           7           7                       0           4
                                             -------------------------------------------------------------------------
  Total.........................                     110          74          49          35          25          85
--------------------------------------------------------------------------------------------------------------------------------------------------------

DPM Pool % = (65/110) = 59.1%
DPM Max. Share, P = (65/110)  x  85 = 50.2 or 50
DPM Min. Share, M = (0.3  x  85) = 25.5 or 26
Potential additional DPM share = 24

Notes

    1. The DPM pool share is 65/110 or 59.1%, or a maximum allocation 
of 50 contracts. The DPM minimum TPR share is 30% of 85, or 26 
contracts. The potential additional DPM share is (P-M), or (50-26) or 
24 contracts. To begin, the DPM TPR share of 26 is allocated, leaving 
59.
    2. The Market Turner is fully filled with 10, leaving 49.
    3. The pro rata distribution of the remaining 49 is done. The DPM's 
pro rata share is 26. Giving the DPM 26 more would put its fill (26 + 
26 = 52) greater than its original pool share of 50 (P). Therefore, the 
DPM is filled only up to 50. This takes 24 out of 49, leaving 25.
    4. A second pro rata calculation is done to distribute the 
remainder of 25 to the non-DPM orders in the pool.

    Price-Time Pro Rata Example 3. Assume that priority is (1) 
customer, (2) DPM, (3) Market Turner. No customer orders are 
included to simplify the example. In this example, the Market Turner 
and the DPM are both filled, with the DPM getting less than its 
minimum TPR of n (30%) because of its size. Note that the DPM has 
two orders. For this allocation method, the DPM size is aggregated 
and filled after the Market Turner is filled.

------------------------------------------------------------------------
                Time                        Category           Bid qty
------------------------------------------------------------------------
1..................................  MT....................           20
2..................................  DPM bid1..............           10
3..................................  B/D1..................           35
4..................................  DPM bid2..............           10
5..................................  MM2...................           25
6..................................  MM3...................           10
                                                            ------------
                                         Total.............          110
------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Bids for     Prorata                DPM   30%   Remaining
                        Category                           Fill seq.   Bid qty.     P.R. #1    alloc #1      Fills      alloc.       qty.        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          85
                                                                                                                              20          65           1
MT......................................................           1          20  ..........  ..........          20  ..........          45           2
DPM size................................................           2          20  ..........  ..........          20         -20          45           3
B/D1....................................................           3          35          35          23          23  ..........          22           4
MM2.....................................................           3          25          25          16          16  ..........           6           4
MM3.....................................................           3          10          10           6           6  ..........           0           4
                                                                     -------------------------------------------------
    Total...............................................  ..........         110          70          45          85  ..........  ..........  ..........
--------------------------------------------------------------------------------------------------------------------------------------------------------

DPM Pool % = (20/110) = 18%
DPM Max. Share, P = (20/110)  x  85 = 15.5 or 16
DPM Min. Share, M = (0.3  x  85) = 25.5 or 26
Actual DPM share, limited by his size = 20

Notes

    1. The DPM pool share is 20/110 or 18.2%, or a maximum allocation 
of 16 contracts. The DPM TPR share is 30% of 85, or 26 contracts. 
However, the DPM is allocated only up to its size of 20, leaving 65.
    2. The Market Turner is fully filled with 20, leaving 45.
    3. The DPM is filled with its allocation of 20. The remainder stays 
at 45 because 45 already account for the DPM allocation.
    4. A second pro rata calculation is done to distribute the 
remainder of 45 to the non-DPM orders in the pool.


[[Page 31030]]


    Price-Time Pro Rata Example 4. Assume that priority is (1) 
customer, (2) DPM, (3) Market Turner. No customer orders are 
included to simplify the example. In this example, the DPM is also 
the Market Turner. The Market Turner priority is ignored if the 
Market Turner order is a DPM order.


------------------------------------------------------------------------
                Time                        Category           Bid qty
------------------------------------------------------------------------
1..................................  DPM bid1..............           15
2..................................  B/D1..................           20
3..................................  DPM bid2..............           50
4..................................  MM2...................           15
5..................................  MM3...................           10
                                                            ------------
                                         Total.............          110
------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Bids for    Pro rata    Bids for    Pro rata                DPM   30%   Remaining
            Category               Fill seq.    Bid qty     P.R. #1    alloc #1     P.R. #2    alloc #2      Fills      alloc.        qty        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          85
                                                                                                                              26          59           1
DPM MT..........................           1          15  ..........  ..........  ..........  ..........           0  ..........          59           2
DPM size........................           2          65          39          27  ..........  ..........          50         -26          35           3
B/D1............................           3          20          20          14          20          16          16  ..........          19           4
MM2.............................           4          15          15          11          15          11          11  ..........           8           4
MM3.............................           5          10          10           7          10           8           8  ..........           0           4
                                             -------------------------------------------------------------------------
  Total.........................  ..........         110          84          59          45          35          85  ..........  ..........  ..........
--------------------------------------------------------------------------------------------------------------------------------------------------------

DPM Pool % = (65/110) = 59.1%
DPM Max. Share, P = (65/110)  x  85 = 50.2 or 50
DPM Min. Share, M = (0.3  x  85) = 25.5 or 26
Potential additional DPM share = 24

Notes

    1. The DPM pool share is 65/110 or 59.1%, or a maximum allocation 
of 50 contracts. The DPM minimum TPR share is 30% of 85, or 26 
contracts. The potential additional DPM share is (P-M), or (50 - 26) = 
24 contracts. To begin, the DPM TPR share of 26 is allocated, leaving 
59.
    2. Since the Market Turner is a DPM order, the Market Turner order 
of 15 is not filled, leaving 59.
    3. The pro rata distribution of 59 is calculated. The DPM's pro 
rata share is 27. Giving the DPM 27 more puts its fill (26 + 27 = 53), 
greater than its pool share of 50. The DPM pro rata share is then 
limited to 24, leaving 35.
    4. A second pro rata calculation is done to distribute the 
remainder of 35 to the non-DPM orders in the pool.

    Price-Time Pro Rata Example 5. Assume that priority is (1) 
customer, (2) Market Turner, (3) DPM. No customer orders are 
included to simplify the example.

------------------------------------------------------------------------
                Time                        Category           Bid qty
------------------------------------------------------------------------
1..................................  MT....................           10
2..................................  DPM bid1..............           15
3..................................  B/D1..................           20
4..................................  DPM bid2..............           50
5..................................  MM2...................            5
6..................................  MM3...................           10
                                                            ------------
                                         Total.............          110
------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Bids for    Pro rata    Bids for    Pro rata                DPM   30%   Remaining
            Category               Fill seq.    Bid qty     P.R. #1    alloc #1     P.R. #2    alloc #2      Fills      alloc.        qty        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
                                                                                                                                          20
MT..............................           1          10  ..........  ..........  ..........  ..........          10           3           7           1
DPM size........................           2          65          62           5  ..........  ..........           7          -3           3           2
B/D1............................           3          20          20           1          20           2           2  ..........           1           3
MM2.............................           4           5           5           0           5           0           0  ..........           1           3
MM3.............................           5          10          10           1          10           1           1  ..........           0           3
                                             -----------------------------------------------------------------------------------------------------------
  Total.........................  ..........         110          97           7          35           3          20  ..........  ..........  ..........
--------------------------------------------------------------------------------------------------------------------------------------------------------

DPM Pool % = (65/100) = 65.0%
DPM Max. Share, P = (65/100)  x  10 = 6.5 or 7
DPM Min. Share, M = (0.3  x  10) = 3.0

Notes

    1. The Market Turner is fully filled with 10, and the DPM is 
allocated its 30% or 3, leaving a remainder of 7.
    2. The pro rata distribution of the remaining 7 is done. The DPM's 
pro rata share is 5. Giving the DPM 5 more would put its fill (3 + 5 = 
8) greater than its original pool share of 7 (P). Therefore, the DPM is 
filled only up to 7. This takes 4 from 7, leaving 3.
    5. A second pro rata calculation is done to distribute the 
remainder of 3 to the non-DPM orders in the pool.

    Price-Time Pro Rata Example 6. Assume that priority is (1) 
customer, (2) Market Turner, (3) DPM. No customer orders are 
included to simplify the example. In this case, the DPM's original 
pool share is less than its minimum 30% TPR share. The DPM's 
participation is limited to the 30% TPR share.

------------------------------------------------------------------------
                Time                        Category           Bid qty
------------------------------------------------------------------------
1..................................  MT....................           10
2..................................  DPM bid1..............           10
3..................................  B/D1..................           20
4..................................  DPM bid2..............           10
5..................................  MM2...................           50
6..................................  MM3...................           10
                                                            ------------
                                         Total.............          110
------------------------------------------------------------------------


[[Page 31031]]


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Bids for    Pro rata    Bids for    Pro rata                DPM   30%   Remaining
            Category               Fill seq.    Bid qty     P.R. #1    alloc #1     P.R. #2    alloc #2      Fills      alloc.        qty        Notes
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
                                                                                                                                          20
MT..............................           1          10  ..........  ..........  ..........  ..........          10           3           7           1
DPM size........................           2          20          17           1  ..........  ..........           3          -3           7           2
B/D1............................           3          20          20           2          20           2           2  ..........           5           3
MM2.............................           4          50          50           3          50           4           4  ..........           1           3
MM3.............................           5          10          10           1          10           1           1  ..........           0           3
                                             -----------------------------------------------------------------------------------------------------------
  Total.........................  ..........         110          97           7          80           7          20  ..........  ..........  ..........
--------------------------------------------------------------------------------------------------------------------------------------------------------

DPM Pool % = (20/100) = 20.0%
DPM Pool Share, P = (20/100)  x  10 = 2.0
DPM Min. Share, M = (0.3  x  10) = 3.0

Notes

    1. The Market Turner is fully filled with 10, and the DPM is 
allocated its 30% or 3, leaving a remainder of 7.
    2. The pro rata distribution of the remaining 7 is done. The DPM's 
pro rata share is 1. Giving the DPM 1 more would put its fill (3 + 1 = 
4), greater than its original pool share of 2 (P) or its TPR share of 
3. Therefore, the DPM gets zero additional contracts.
    3. A second pro rata calculation is done to distribute the 
remainder of 7 to the non-DPM orders in the pool.

    Pro Rata Calculation Example. Remaining quantity of 49 is to be 
allocated to four orders as shown below.

Alloc. % = (Order Qty  x  100/Total Order Qty)
Calc. Qty = (Alloc. %)  x  Remaining Quantity
Alloc. Qty = Calc. Qty rounded up/down
    In each step the allocated quantity is determined for one order. 
See the Final Allocations where the ``Calc. Qty'' is rounded up/down to 
the ``Alloc. Qty.'' In the last step, the ``Alloc. Qty'' for the two 
last orders is determined.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Remaining
                                                                              Order 1      Order 2      Order 3      Order 4    Total order     qty to
                                                                                                                                    qty        allocate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Step 1.....................................  Order qty....................           20           39            5           10           74           49
                                             Alloc. %.....................         27.0         52.7          6.8         13.5  ...........  ...........
                                             Calc. qty....................         13.2         25.8          3.3          6.6  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Step 2.....................................  Order qty....................  ...........           39            5           10           54           36
                                             Alloc. %.....................  ...........         72.2          9.3         18.5  ...........  ...........
                                             Calc. qty....................  ...........  ...........  ...........         26.0          3.3          6.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Step 3.....................................  Order qty....................  ...........  ...........            5           10           15           10
                                             Alloc. %.....................  ...........  ...........         33.3         66.7  ...........  ...........
                                             Calc. qty....................  ...........  ...........          3.3          6.7  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
             Final Allocations
Step 1.....................................  Alloc. qty...................           13  ...........  ...........  ...........           13  ...........
Step 2.....................................  Alloc. qty...................  ...........           26  ...........  ...........           26  ...........
Step 3.....................................  Alloc. qty...................  ...........  ...........            3            7           10  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Total allocated qty =            49
--------------------------------------------------------------------------------------------------------------------------------------------------------

d. Crossing Orders
    Interim Procedure. Initially, an SBT Trader would be able to cross 
orders only after giving all other market participants an opportunity 
to trade against the orders. Pursuant to proposed CBOE Rule 43.12A, if 
an SBT Broker held orders to buy and sell the same option series and 
wanted to cross such orders, the SBT Broker would first have to send an 
RFQ with the size of the orders to be crossed. The RFQ response period 
would be for a period of time established by the appropriate SBT 
Trading Committee and initially would be set at 30 seconds.\17\
---------------------------------------------------------------------------

    \17\ CBOE has advised that it intends to amend the proposed rule 
change to establish a minimum time period for response to the RFQ. 
Telephone conversation of April 5, 2002.
---------------------------------------------------------------------------

    At the end of this RFQ response period and by the end of a second 
time period of 20 seconds or some other duration as established by the 
appropriate SBT Trading Committee, the SBT Broker would have to expose 
one of the orders to the SBT Book. If the SBT Broker had two customer 
orders to cross, the broker would use his or her discretion to 
determine which of the orders to expose to the SBT Book. Both orders 
would receive price improvement, however, because the cross would have 
to be consummated between the best bid and offer. After the SBT Broker 
had entered the order to be exposed on the book, other SBT Traders 
would have a specified time period in which to trade against it. This 
time period would be established by the appropriate SBT Trading 
Committee and initially would be set at ten seconds.\18\ If the exposed 
order were not completely taken out by other SBT Traders at the end of 
this period, the SBT Broker could enter the opposite order to cross any 
balance of the exposed order that remained.\19\
---------------------------------------------------------------------------

    \18\ Id.
    \19\ Id.
---------------------------------------------------------------------------

    An SBT DPM/LMM would not be entitled to receive its participation 
right on a cross transaction executed pursuant to proposed CBOE Rule 
43.12,

[[Page 31032]]

Crossing Mechanism, or 43.12A, Interim Crossing Procedure, because the 
trade would necessarily occur at a price between the best bid and offer 
previously established.
    It would be a violation of proposed CBOE Rule 43.12 (described 
below) or of proposed CBOE Rule 43.12A for an SBT Broker to be a party 
to any arrangement designed to circumvent CBOE Rule 43.12 or Rule 
43.12A by providing an opportunity for a customer to regularly execute 
against agency orders handled by the SBT Broker immediately upon their 
entry into the System.
    It also would be a violation of proposed CBOE Rules 43.12 or 43.12A 
for an SBT Broker to cause the execution of an order it had represented 
as agent on the Exchange by orders it solicited from members and non-
member broker-dealers to transact with such orders, whether such 
solicited orders were entered into the System directly by the SBT 
Broker or by the solicited party (either directly or through another 
member), if the member failed to expose orders on the Exchange as 
required by proposed CBOE Rules 43.12 or 43.12A.
    CBOE has represented that it would surveil for instances where an 
SBT Broker had entered orders that were executed against each other 
without being executed pursuant to proposed CBOE Rules 43.12 or 43.12A. 
CBOE believes that this activity would be relatively simple for it to 
identify.
    Crossing Mechanism. CBOE has stated that the System would 
eventually provide for a participation right for SBT Brokers wishing to 
cross orders. Once the System has been enabled to provide for such 
right, the Crossing Mechanism would be a process by which an SBT Broker 
could facilitate an original order or cross two original orders.\20\ 
The Crossing Mechanism would permit an SBT Broker, after requesting and 
receiving a market from other SBT Traders through the RFQ process, to 
cross a guaranteed percentage of an original customer order with a 
facilitation order or second customer order at a price that improved 
upon the market that the SBT Broker had received. The Crossing 
Mechanism would then expose the remaining portion of the original order 
to other SBT Traders, giving them an opportunity to trade against it, 
ahead of the SBT Broker, within a specified time period of 20 seconds.
---------------------------------------------------------------------------

    \20\ CBOE has advised that it intends to amend the proposed rule 
change to establish a minimum eligible order size for transactions 
using the Crossing Mechanism. Id.
---------------------------------------------------------------------------

    As with the Interim Procedure, to use the Crossing Mechanism, an 
SBT Broker would first have to submit to the System an RFQ designating 
a size equal to the quantity to be crossed. SBT Traders would then have 
an RFQ response period for a length of time established by the SBT 
Trading Committee to enter orders or quotes that matched or improved 
upon the existing quotations on the System.\21\
---------------------------------------------------------------------------

    \21\ CBOE has advised that it intends to amend the proposed 
rules change to establish a minimum time period for response to the 
RFQ. Id.
---------------------------------------------------------------------------

    At the end of the RFQ response period and by the end of the second 
time period to be established by the SBT Trading Committee (likely to 
be 20 seconds), the SBT Broker would have to enter the terms of the 
proposed cross transaction.\22\ The required terms would include the 
terms of the original order and the proposed facilitation order (or two 
original orders), a proposed crossing price, the quantity of the 
original order that the SBT Broker would be willing to facilitate (in 
the case of a facilitation cross), and an indication of which order is 
to be exposed to the market (in the case of a cross of two original 
orders)--i.e., after the guaranteed crossing percentage had been 
applied as described below. The customer order would be the exposed 
order in a facilitation cross.
---------------------------------------------------------------------------

    \22\ Id.
---------------------------------------------------------------------------

    The following two conditions would have to be satisfied at the time 
the cross transaction was entered or the System would reject the cross 
transaction: (1) A legal width market would have to exist for the 
particular series to be crossed, and (2) the proposed cross price would 
have to be between the best bid and offer displayed by the System.
    If all the terms were properly entered and the two aforementioned 
conditions were satisfied, the System would immediately cross the two 
orders up to the amount of the guaranteed crossing percentage (i.e., 
40%) of the crossing quantity. For example, if the crossing quantity 
were 1,000 and the guaranteed crossing percentage were 40%, the System 
immediately would trade 400. After this immediate execution of the 
guaranteed percentage of the cross, the System would expose the 
remaining volume of the original customer order in the SBT Book at the 
same price for a period of 20 seconds.\23\ During this period, the 
other SBT Traders would be given the opportunity to trade against the 
remaining 60% of the original order ahead of the submitting SBT Broker, 
while the System placed the opposite order on hold as a shadow order 
that would not be visible except to the submitter.\24\ The exposed 
order's price and quantity would be disclosed but the System would not 
indicate that the order was part of an overall crossing transaction, 
40% of which had already been executed, and the remaining part of which 
would be pending as a cross of the exposed order with the shadow 
order.\25\
---------------------------------------------------------------------------

    \23\ In the example above, the System would show only an order 
for 600 contracts, and the original size of 1,000 would not be 
exposed to the other SBT Traders. However, a trade of 400 contracts 
at the crossing price would appear on the tape of the reported 
trades.
    \24\ CBOE has advised that it intends to amend the proposed rule 
change to incorporat e an interpretation advising that it would be a 
violation of an SBT Trader's duty of best execution to its customer 
if it were to cancel a crossing transaction to avoid execution of 
the order at a better price. Telephone conversation of April 5, 
2002.
    \25\ Id.
---------------------------------------------------------------------------

    As long as the exposed order was the highest priority order at the 
best price, other SBT Traders could trade against the exposed order 
during the 20-second exposure period. If the exposed order were fully 
filled by other traders, the System would cancel the remaining quantity 
of the shadow order and send the crossing firm a message that the 
crossing transaction was completed.
    At the end of the exposure period, if the exposed order had 
quantity remaining and if it were at the best price and had the highest 
priority, the System would fill the remainder of the order with the 
shadow order. The System would cancel the remaining quantity of the 
shadow order and send the crossing firm a message that the crossing 
transaction was completed. If the exposed order had quantity remaining 
and it were not the highest priority order at the market (i.e., it were 
not the highest bid/lowest offer), the System automatically would 
cancel the remainder of the exposed order and send the SBT Broker a 
message that the crossing transaction was completed.
    For example, assume the exposed (customer) order buy quantity is 
1,000 and 500 were filled before the end of the exposure period. If the 
order were at the best price and had the highest priority, the 
remaining 500 would be filled by the shadow (firm) order at the 
crossing price. However, if the exposed order were not at the best 
price or did not have the highest priority at its price, the remaining 
500 of the exposed order would be canceled.
    Proposed CBOE Rule 43.12A would apply until the System has been 
enabled to provide for this Crossing Mechanism.

[[Page 31033]]

e. Market Order Processing
    Proposed CBOE Rule 43.7 would govern the processing of market 
orders on CBOEdirect. CBOE has stated that, in developing the market 
order processing rules, it sought to balance two customer protection 
interests: (1) Ensuring that an order is executed against current 
quotes, and (2) ensuring that an order is executed quickly.\26\ To 
ensure the order is executed against current quotes, the System would 
protect a market order by automatically executing it against the best 
bid/ask only if there were a legal width market.\27\ The System would 
match market orders against orders at the best price in the SBT Book 
and against the other orders behind the best price at varying prices 
until, after trading against the bids or offers, a legal width market 
no longer existed.
---------------------------------------------------------------------------

    \26\ In most cases, at least if the System were used during an 
RTH session, market orders would execute immediately because CBOE 
expects there would be a legal width market for most series at most 
times.
    \27\ A pair of unrelated bid and offer orders, whose sizes may 
be less than the minimum quote size, separated by the Exchange-
prescribed width, would be sufficient to trigger the trade of an 
incoming market order. It would not be necessary to have a standard 
quote (i.e., a pair of bid and ask orders that are part of the same 
quote) meeting the minimum quote size and the prescribed width 
requirements.
---------------------------------------------------------------------------

    If there were no legal width market when the order was entered in 
the System, or if any portion of the market order were not executed 
because there were no longer a legal width market, the System would 
hold the order (or any remaining portion of the order) in queue, send 
an RFQ to SBT Market Makers currently providing quotes, and send a 
notice to the originator of the order about the order status.
    An RFQ sent pursuant to these procedures would include the market 
order quantity but not whether the order was a buy or a sell. RFQ 
responses would be sent to the SBT Book. From this point, the System 
would attempt to execute the market order if any one of the following 
conditions became true (as specified in proposed CBOE Rule 43.7):\28\
---------------------------------------------------------------------------

    \28\ In determining to provide for an execution upon the 
occurrence of any of these particular events, CBOE sought to balance 
the interests of the Exchange's customers in receiving a quick and 
certain execution against the desire of the Exchange and the 
interests of its customers in ensuring that executions occur only in 
circumstances where there is a high level of market participation 
and/or liquidity.
---------------------------------------------------------------------------

    1. During the RFQ expiration response time, if the best quote width 
became a certain prescribed percentage (e.g., 75%)--as set by the 
appropriate SBT Trading Committee--of the legal width market.\29\
---------------------------------------------------------------------------

    \29\ CBOE believes that this condition would help to minimize 
the queuing time of the market order.
---------------------------------------------------------------------------

    2. If an incoming immediately executable limit order were received 
on the same side of the market as the market order and at least one 
legal width quote were received.\30\
---------------------------------------------------------------------------

    \30\ CBOE believes that this condition would prevent the later-
arriving limit order from executing ahead of the market order, thus 
preserving time priority. Under this condition, if no quote had been 
received, the limit order would execute ahead of the market order.
---------------------------------------------------------------------------

    3. If a certain prescribed percentage of the market makers 
currently providing quotes in the class--the percentage to be set by 
the appropriate SBT Trading Committee--had responded to the RFQ.
    4. If the RFQ period expired and there were at least one quote 
response.
    5. If one or more market orders were entered on the opposite side 
and there were a legal width market at the time the particular order 
arrived.
    If any of the above conditions were met, the System would execute 
the market order against orders in the SBT Book or immediately against 
an incoming market order on the opposite side. If there were volume 
remaining in the market order, the System would hold it in queue and 
repeat the RFQ cycle. The System also would send a notice to the 
originator of the order status and give the originator the option to 
cancel the order.
    If the RFQ period expired and there were no RFQ response, the 
System would send an alert message to the Help Desk. The Help Desk 
could solicit quotes from the SBT Market Makers and require a response 
from them.
    The following describes the price at which the System would execute 
the market order. If the System were executing the market order against 
a market order that had been entered on the opposite side at the time a 
legal width market was present, the System would cross the market 
orders at a price between the bid and offer, as further described in 
proposed CBOE Rule 43.7.
    If an incoming RFQ response could execute against a market order as 
well as older limit orders (at a particular price), then:
    1. If the incoming RFQ response were of large enough quantity to 
fill all the older limit orders and the market order, all of those 
orders would be filled at the price of the older limit orders.
    2. If the incoming RFQ response were not large enough to fill all 
of the older limit orders, the market order would be executed at the 
minimum price interval ahead of the older limit orders.\31\
---------------------------------------------------------------------------

    \31\ CBOE believes that this condition would prevent a violation 
of time priority because the market order would be executed at a 
price to which the limit order would not be entitled.
---------------------------------------------------------------------------

    If a market order for a certain series became subject to an RFQ as 
described above, then subsequent market orders for the same series and 
side would be queued to ensure that these incoming market orders were 
processed in time sequence.
    If trading were halted while a market order was on hold waiting for 
RFQ responses, the SBT System would do the following:
    1. If the market order were a GTC order, the System would hold and 
execute it at the next opening, in the same day or the next day.
    2. If the market order were a day order, the System would execute 
it at re-opening if trading resumed for the same day.
    3. If trading did not resume, the System would purge the market 
order as part of the end-of-day procedure for purging day orders.

Market Order Processing Examples

    Example 1. When the System receives a market order, it would 
check for the presence of a legal width market. If there were no 
legal width market, the System automatically would hold the market 
order in queue and send an RFQ. If a legal width market existed, the 
market order would execute against the best order in the SBT Book 
and against the other orders behind the best, at varying prices 
until the market order was fully filled or until a legal width 
market no longer existed.
    Assume there are six SBT Market Makers assigned to the product. 
The maximum allowable quote width, and the legal width market, for a 
bid range of $5.01 to $10.00 is $0.50. The SBT Book looks as 
follows:

------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
5............................................     6.25  .......  .......
25...........................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    A market order to buy 35 arrives.
    Since a legal width market exists (6.75-6.25 = 0.50), the market 
order is filled with 10 at 6.75, leaving 25 to be executed. Now, the 
market width is no longer standard (6.90-6.25 = 0.65, i.e., wider than 
the 0.50 allowed). The System places the remaining 25 contracts of the 
market order on hold and automatically issues an RFQ for a quantity of 
25.
    The System reports the best quote to OPRA as 6.25-6.90, 5  x  20. 
The market order is not exposed in the SBT Book. The book now looks as 
follows:

[[Page 31034]]



                           Market Order for 25
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
5............................................     6.25  .......  .......
25...........................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Example 2. The System would expose the incoming quotes (i.e., 
RFQ responses) in the SBT Book. During the RFQ expiration time, if 
the best quote width became the designated percentage of the legal 
quote width (e.g., 75%) or less, the System would execute the market 
order against the quote and any other eligible booked order until 
the order were fully filled or until the legal width market no 
longer existed. If the latter occurred, the System would hold the 
market order in queue again, send an RFQ, and send a notice to the 
originator about the order status.
    Continuing with the example from above, assume the first quote, 
6.25-6.75, 10  x  10, arrives. The market order does not trade even if 
the market is legal width (6.75-6.25 = 0.50) because none of the 
requirements is met. The market width is not 75% (assuming this is the 
designated percentage) or less of the legal width market. In addition, 
50% (i.e., 3) or more of the market makers have not responded. Finally, 
the RFQ response time has not expired. This rule would protect the 
market order by ensuring that it did not trade against the first quote 
that came in that could have a standard width yet be off the market 
expressed by the other market makers. The System reports the best quote 
to OPRA as 6.25-6.75, 15  x  10.
    The SBT Book now looks as follows:

                           Market Order for 25
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
5............................................     6.25  .......  .......
25...........................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Now assume a second quote, 6.25-6.55, 10  x  10 arrives. Since the 
market width is now 0.30 (i.e., 60% of the legal width market), the 
market order trades with the best order on the opposite side and any 
other orders behind it, until the market width is no longer standard. 
The market order is filled for 10 at 6.55, then for 10 more at 
6.75.\32\ The System then automatically issues a second RFQ for the 
remaining quantity of 5. The System reports the best quote to OPRA as 
6.25-6.90, 25  x  20. The book now looks as follows:
---------------------------------------------------------------------------

    \32\ CBOE believes that it is appropriate for a portion of the 
balance of the market order to execute at a price outside of the 
designated percentage of the legal width market in accordance with 
the market order processing procedures because, among other things: 
(1) An opportunity was provided for additional market participants 
to submit quotes priced within the designated percentage of the 
legal width market; (2) continuing to hold the balance of the order 
would cause unnecessary queuing of marketable orders; and (3) under 
CBOE market order processing procedures, no portion of the market 
order would be executed outside of a legal width market. Further, 
CBOE notes that, for multiply listed option classes, NBBO 
considerations would also protect the market order. E-mail from 
Angelo Evangelou, Legal Division, CBOE, to Michael Gaw, Division, 
Commission, dated November 13, 2001.

                           Market Order for 5
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
25...........................................     6.25  .......  .......
25...........................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Now assume that a quote, 6.25-6.75, 10  x  10, arrives. Again, the 
market order does not trade even if a legal width market exists. Only 
one market maker of six has responded. The quote width is not 75% or 
less of the legal width market. The System reports the best quote to 
OPRA as 6.25-6.75, 35  x  10. The book now looks as follows:
---------------------------------------------------------------------------

    \33\ Exhibit 1 of Amendment No. 1 contains a typographical 
error, and this figure was incorrectly reported as 30. CBOE has 
confirmed that 25 is in fact the correct figure. Telephone 
conversation between Angelo Evangelou, Legal Division, CBOE, and 
Michael Gaw, Division, Commission, on November 9, 2001.

                           Market Order for 5
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
35...........................................     6.25  .......  .......
25 \33\......................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Example 3. If the System received a limit order on the same side 
of the market as the market order that could match the best bid/
offer and at least one quote had been received, creating a legal 
width market, the System would execute the market order against the 
best bid/offer. The market order would trade ahead of the just-
arrived limit order because it had time priority. The presence of a 
legal width market coupled with a limit order on the same side as 
the market order, ready to trade against the best opposite side 
order, would protect the market order from trading at an 
unreasonable price. If there were no legal width market, the market 
order would be ``protected'' from trading and the limit order would 
be filled ahead of the market order.
    Continuing with the example above, assume a limit order to buy 
10 at 6.75 arrives. The buy limit order matches the best offer and 
there is a legal width market. Therefore, the market order trades 
against 5 of the best offer of 6.75. The limit order to buy then 
trades with the remaining 5 offered at 6.75. The System reports the 
best quote to OPRA as 6.75-6.90, 5  x  20. The book now looks as 
follows:

------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
5............................................     6.75  .......  .......
35...........................................     6.25  .......  .......
25...........................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Example 4. If an incoming RFQ response could execute against a 
market order as well as older limit orders (i.e., limit orders that 
were on the SBT Book before the market order was entered) at a 
particular price, then, if the incoming RFQ response were of large 
enough quantity to fill all the older limit orders and the market 
order, all of those orders would be filled at the price of the older 
limit orders.
    Assume that a market order for 5 is on hold and that the bids 
for 6.25 are older than the market order. Assume that the book looks 
as follows:

                           Market Order for 5
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
35...........................................     6.25  .......  .......
25...........................................     6.15  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Now assume that a quote of 6.00-6.20, 50  x  50 arrives. The market 
is crossed for an instant at 6.25-6.20, 35  x  50. The System does not 
report this instantaneous best quote to OPRA. It will send a best quote 
report after the cross is traded out (which will happen immediately). 
Since the 50 offered at 6.20 could fill all the limit orders to buy at 
6.25 and the market order (total quantity of 35+5) at 6.25, then the 
market order is filled at 6.25. When the market is crossed the 
execution price is the price of the older order. The System reports the 
best quote to OPRA as

[[Page 31035]]

6.15-6.20, 25  x  10. The book now looks as follows:

------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
                                                           6.20       10
25...........................................     6.15  .......  .......
50...........................................     6.00  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Example 5. If an incoming RFQ response were not large enough to 
fill all the older limit orders, the market order would be executed 
at the minimum price interval ahead of the older limit orders. 
Executing at a better price would enable the market order to trade 
ahead of the older limit order, thus preserving time priority.
    Assume that there is a market order to buy 5 on hold and that 
the bids at 6.25 are older than the market order. Assume that the 
book looks as follows:

                            Market Order of 5
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
35...........................................     6.25  .......  .......
25...........................................     6.15  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Now assume that a quote 6.00-6.25, 10  x  10 arrives. The market is 
locked for an instant at 6.25-6.25, 35  x  10. The System does not 
report the instantaneous best quote to OPRA (because the quote will be 
traded instantly). The System will send a best quote report after the 
locked market is traded out. Because the 10 traded at 6.25 could not 
fill all the limit orders to buy at 6.25 and the market order (total 
quantity of 35 + 5 = 40) at 6.25, then the market order is filled at 
6.30, one minimum tick ahead of the older limit orders at 6.25.\34\ The 
remaining 5 offered at 6.25 trades with 5 of the older limit orders to 
buy at 6.25. The System reports the best quote to OPRA as 6.25-6.75, 30 
\35\  x  10. The resulting book looks as follows:
---------------------------------------------------------------------------

    \34\ CBOE assumes the minimum tick for purposes of this example 
is $0.05.
    \35\ Exhibit 1 of Amendment No. 1 contains a typographical 
error, and this figure was incorrectly reported as 35. CBOE has 
confirmed that 30 is in fact the correct figure. Telephone 
conversation between Angelo Evangelou, Legal Division, CBOE, and 
Michael Gaw, Division, Commission, on November 9, 2001.

------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
30 \36\......................................     6.25  .......  .......
25...........................................     6.15  .......  .......
10...........................................     6.00  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Example 6. If the older limit order is a Fill or Kill (``FOK'') 
order or an All or None (``AON'') contingency order and the just-
arrived order could trade with the contingency order, the market 
order would be executed at the price of the contingency order. The 
market order need not trade at a minimum price interval to step 
ahead of the older contingency order because contingency orders 
would have to yield priority to market orders even if they were 
received before the market order.
---------------------------------------------------------------------------

    \36\ 36 See id.
---------------------------------------------------------------------------

    Assume that there is a market order to buy 5 on hold. Assume 
that the 10 bid at 6.25 is older than the market order and that this 
bid is a FOK or an AON contingency order. The System reported the 
best quote to OPRA as 6.20-6.75, 25  x  10. Note that the FOK or AON 
contingency order does not affect the best quote report sent to 
OPRA. Only limit orders and IOC orders are reflected in the best 
quote report sent to OPRA. Assume the book looks as follows:

                           Market Order for 5
------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
10...........................................     6.25  .......  .......
25...........................................     6.20  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    Now assume that a quote 6.00-6.25, 10  x  10 arrives. Because the 
10 offered at 6.25 could not fill all the older limit orders and the 
market order (total quantity of 10 + 5 = 15) at 6.25, the market order 
is filled at 6.25, at the price of the contingency order. Now the book 
looks as follows:

------------------------------------------------------------------------
                                                                   Book
                Book bid size                    Book     Book     ask
                                                 bid      ask      size
------------------------------------------------------------------------
                                                           6.95        5
                                                           6.90       20
                                                           6.75       10
                                                           6.25        5
10...........................................     6.25  .......  .......
25...........................................     6.20  .......  .......
10...........................................     6.00  .......  .......
5............................................     5.95  .......  .......
------------------------------------------------------------------------

    The book is displayed as locked because the 10 AON or FOK bid at 
6.25 has to be filled in its entirety. Note that only the SBT Traders 
using the System are aware of this lock condition. The System reports 
to OPRA a best quote of 6.20-6.25, 25  x  5.
    To summarize, if the designated percentage (e.g., 50%) of the 
assigned market makers had responded to the RFQ or if the RFQ period 
had expired and there were at least one standard quote response, the 
System would execute the market order against the book. If there were 
volume remaining in the market order, the System would hold it in queue 
and repeat the RFQ cycle. The System also would send a notice to the 
originator of the order status and give the originator the option to 
cancel the order.
    If the RFQ expired and there were no RFQ response, the System would 
continue to hold the market order, repeat the RFQ cycle, send a notice 
to the originator about the order status, and send an alert message to 
the Help Desk about the lack of an RFQ response. The originator of the 
order could cancel the order if the originator wished. The Help Desk 
would contact the assigned market makers.
    If the market order could be executed under the conditions cited 
above and there were one or more market orders on the opposite side, 
the System would cross the market orders at a price determined as 
follows:
    1. At the middle of the best bid/offer in the book if the middle 
price were a legal price (i.e., a price that could be quoted in the 
System).
    2. If the middle price were not a legal price, at the next legal 
price from the middle that was closer to the last trade price of the 
product.
f. Limit Order Processing
    Until CBOEdirect is enabled to provide price protection under 
proposed CBOE Rule 43.8A, after the opening, upon being entered into 
the System, limit orders would be matched against the best prices 
available in the SBT Book under the priority rules set forth in 
proposed CBOE Rule 43.1. If there were no orders in the SBT Book that 
matched the limit order when it was entered, the limit order would be 
held in the book and could be traded against later submitted orders.
    When CBOEdirect is enabled to provide price protection, the System 
would protect limit orders by automatically executing the limit order 
against the best bid/ask only if one or both of the following 
conditions were met:
    1. A legal width market existed for that series; or
    2. The limit price on the order was between the bid of the series 
with the same expiration month and one strike price lower and the offer 
of the series

[[Page 31036]]

with the same expiration month and one strike price higher, and a legal 
width market existed for both of these series.
    Example: Assume the SBT Book looks like the following:

----------------------------------------------------------------------------------------------------------------
                           Series                                 Size         Bid          Ask          Size
----------------------------------------------------------------------------------------------------------------
July 50.....................................................           10          *10           11           20
July 55.....................................................  ...........  ...........         9.75           10
July 60.....................................................           50          1.5        *1.75          25
----------------------------------------------------------------------------------------------------------------
* The marked (*) prices set the range for an acceptable execution price.

    A limit order to buy 10 July 55s at 9.75 is entered. This trade 
would be executed at 9.75 because the price of execution is between the 
bid of the July 50s (the next lower strike) and the offer of the July 
60s (the next higher strike).
    If a limit order could execute against the best bid/ask and neither 
of the conditions set forth above were met, a message would be sent 
stating that an RFQ would be generated. The RFQ would include the order 
quantity, but not whether the order was a buy or sell. Quote responses 
would be exposed in the book as they were received. The SBT Trader 
linked to CBOEdirect through the API could direct the System to 
override the RFQ and determine to enter the limit order into the SBT 
Book and possibly trade against standing orders or subsequent orders in 
the book, although there might not be a legal width market at the time. 
If the limit order's price prevented it from matching with the best 
bid/ask, the System would place the order in the SBT Book in its 
appropriate priority position.
    Subject to the details set forth in proposed CBOE Rule 43.8A, when 
the limit order price protection feature has been implemented, the 
System would execute the limit order after either one of the following 
conditions became true:
    1. During the RFQ response time, if the best quote width became a 
certain prescribed percentage (e.g., 75%)--as set by the appropriate 
SBT Trading Committee--of a legal width market, the System would 
execute the limit order against the quote and any other eligible booked 
order.
    2. If an incoming market or limit order were received (independent 
of the RFQ responses) on the opposite side that would match the 
original limit order and if a legal width market existed for the 
series, the System would match the limit order with the incoming order.
    3. When a certain prescribed percentage of the SBT Market Makers 
currently providing quotes in that class--the percentage to be set by 
the appropriate SBT Trading Committee--had responded to the RFQ, or 
when the RFQ period expired and there were at least one quote response, 
the System would execute the limit order against the SBT Book.
    If a limit order for a certain series were queued, subsequent limit 
orders for the same series and side would be queued behind the first 
one to ensure that they were processed in time sequence. Market orders 
for the same series and side would be queued. If a legal width market 
remained upon completion of limit order processing, the market order 
would be executed against orders resting in the book. If there were not 
a legal width market, market order processing would begin in accordance 
with Exchange rules.
g. Contingency Order Processing
    CBOE has asserted that CBOEdirect eventually would be enabled to 
handle a number of types of contingency orders pursuant to the terms of 
proposed CBOE Rule 43.9. A contingency order that had been entered 
before a limit order with no contingency at the same price and for the 
same series would nonetheless be treated as if it were entered after 
that limit order. The System would notify the originator of the order 
if the contingency order expired or were canceled. The System would 
handle the following contingency orders as described below once it had 
been enabled to handle such contingency orders.
    1. Opening Only Order. The System would accept an opening only 
order only during the Pre-opening, Halted, or Closed states. The order 
would be executed during the Opening state if there were orders to 
execute it against. The order or any unexecuted portion thereof would 
expire after the opening trade or after the opening quote had been 
disseminated.
    2. All or None Order. An AON order would be executed only if it 
could be executed in its entirety. The order would remain in the book 
until filled or canceled. An AON order would not be disseminated as 
part of the best bid/ask.
    3. Fill or Kill Order. An FOK order has a time contingency and 
would have to be fully filled within a period of time, or the System 
automatically would cancel the order. The System would attempt to 
execute the full quantity of the FOK order upon receipt. If the FOK 
order were at the best price and there were a legal width market, and 
it could not be filled fully, the System would indicate its presence to 
SBT Traders by displaying its quantity for the Time Contingency Period 
as determined by the appropriate SBT Trading Committee. If the FOK 
order did not equal or better the market (i.e., if it were a buy order 
lower than the best bid or a sell order higher than the best offer), 
the System would reject the order.
    4. Immediate or Cancel (``IOC'') Order. An IOC order has a time 
contingency and would have to be filled fully or partially within a 
period of time, or the System automatically would cancel the remainder. 
If the IOC order were at the best price and there were a legal width 
market, and it could not be filled fully, the System would indicate its 
presence to SBT Traders by displaying its quantity for the Time 
Contingency Period as determined by the appropriate SBT Trading 
Committee. If the IOC order did not equal or better the market (i.e., 
if it were a buy order lower than the best bid or a sell order higher 
than the best offer), the System would reject the order. The System 
would cancel the residual order volume after the IOC process period, if 
the IOC order had not been executed completely.
    5. Minimum Volume (``MIN'') Order. A MIN order could be accepted by 
the System at any time. A MIN order would have two quantities 
specified: the total quantity and the minimum acceptable quantity that 
can be filled. The fill would have to equal at least the minimum 
quantity specified. The System would attempt to execute at least the 
minimum volume specified against orders in the book. If the minimum 
volume were not executed, the order would remain in the book.
    6. Stop Order. A stop order to buy becomes a market order when the 
product trades or is bid at or above the stop price. A stop order to 
sell becomes a market order when the product trades or is offered at or 
below the stop price. The System would not display a stop order to 
anyone other than the originator of the order, except as part of the 
contingency count in the book depth information.
    7. Stop Limit Order. A stop limit order has two prices: the stop 
limit price and

[[Page 31037]]

the limit price. A stop limit order to buy becomes a limit order at the 
second price when the product trades or is bid at or above the stop 
limit price (first price). A stop limit order to sell becomes a limit 
order at the second price when the product trades or is offered at or 
below the stop limit price (first price). The System would not display 
a stop limit order to anyone other than the originator of the order, 
except as part of the contingency count in the book depth information.
    8. Market On Close (``MOC'') Order. An MOC order is executable only 
during some defined period of time prior to the close. If there were no 
legal width market when an MOC was received, an RFQ would be sent at a 
certain amount of time before the Closing, as determined by the 
appropriate SBT Trading Committee. If no RFQ response were received, 
the order would be canceled after Closing.
h. Processing of Spread Orders
    Proposed CBOE Rule 43.10 would govern the processing of spread 
orders. The System initially would support the following types of 
spread orders (``Spread Orders'') only:
    1. Two-legged spreads where the ratio is 1:1 and 1:2;
    2. Three-legged spreads where the ratio is 1:1:1 or 1:2:1;
    3. Four-legged spreads where the ratio is 1:1:1:1; and
    4. Any other spread type approved by the appropriate SBT Trading 
Committee.
    The System would treat each spread order as a unique product and 
would assign each a unique product name. The System would maintain a 
book for every unique spread product with bids and offers for 
individual spread packages. The System would keep track of and 
disseminate internally the best bid and offer for every unique spread 
to SBT Traders.
i. Processing of Requests for Quotes
    Proposed CBOE Rule 43.11 would govern the processing of RFQs. Any 
SBT Trader could initiate an RFQ for a series. The SBT Trader could 
specify a size at his or her option but would not specify whether the 
RFQ is for a buy or sell. The System would send the RFQ to the SBT 
Market Makers who were currently providing quotes in that class. The 
System also would automatically send an RFQ when it received a market 
order and the current market width was wider than the Exchange-
prescribed width, as set forth in proposed CBOE Rule 43.5.
    An RFQ would have an expiration period for the SBT Market Makers to 
respond. SBT Market Makers would be required to respond to RFQs in 
accordance with obligations set forth in proposed CBOE Rule 
44.4(b)(ii). RFQ responses would be submitted to the SBT Book and would 
be exposed as they arrived.
j. Trading Directly Against Orders in the Book
    CBOEdirect would provide SBT Traders the means to electronically 
hit a bid or take an offer. An SBT Trader could do a full or partial 
execution of an existing bid or offer.
    1. Hit the Bid. If the bid were no longer available for trading 
(e.g., because the bid had been hit by another trader), the System 
would book the full order (i.e., the order entered to hit the bid) as a 
day or IOC order at the discretion of the trader. If another trader had 
not hit the bid, the results of the trader's attempt to hit the bid 
would be as follows:

------------------------------------------------------------------------
                                    Change to
     Change to price field        quantity field          Results
------------------------------------------------------------------------
None..........................  None.............  Full execution of bid
                                                    orders at bid price.
None..........................  Lower............  Partial execution of
                                                    bid orders at bid
                                                    price.
None..........................  Higher...........  Full execution of bid
                                                    orders at bid price
                                                    and book new order
                                                    to sell at bid price
                                                    with remaining
                                                    quantity.
Lower.........................  None.............  Full execution of bid
                                                    orders at bid price.
Lower.........................  Lower............  Partial execution of
                                                    bid orders at bid
                                                    price.
Lower.........................  Higher...........  Full execution of bid
                                                    orders at the bid
                                                    price and new order
                                                    to sell with
                                                    remaining quantity
                                                    that could either
                                                    execute against
                                                    lower bid orders, if
                                                    any, or be booked.
Higher........................  Any..............  No execution, book
                                                    new order to sell.
------------------------------------------------------------------------

    2. Take the Offer. If the offer were no longer available for 
trading (e.g., because the offer had been taken by another trader), the 
System would book the full order (i.e., the order entered to take the 
offer) as a day or IOC order at the discretion of the trader. If 
another trader had not taken the offer, the results of the trader's 
attempt to take the offer would be as follows:

------------------------------------------------------------------------
                                    Change to
     Change to price field        quantity field          Results
------------------------------------------------------------------------
None..........................  None.............  Full execution of
                                                    offer orders at
                                                    offer price.
None..........................  Lower............  Partial execution of
                                                    offer orders at
                                                    offer price.
None..........................  Higher...........  Full execution of
                                                    offer orders at
                                                    offer price and book
                                                    new order to buy at
                                                    offer price with
                                                    remaining quantity.
Higher........................  None.............  Full execution of
                                                    offer orders at
                                                    offer price.
Higher........................  Lower............  Partial execution of
                                                    offer orders at
                                                    offer price.
Higher........................  Higher...........  Full execution of
                                                    offer orders at the
                                                    offer price and new
                                                    order to buy with
                                                    remaining quantity
                                                    that could either
                                                    execute against
                                                    higher offer orders,
                                                    if any, or be
                                                    booked.
Lower.........................  Any..............  No execution, book
                                                    new order to buy.
------------------------------------------------------------------------

    3. Hit the Debit Spread. If the debit spread were no longer 
available for trading (e.g., because the debit spread had been traded 
by another trader), the System would book the new spread order (i.e., 
the order entered to take the offer), as a new GTC credit spread order. 
If debit spread were still available, the results of the trader's 
attempt to ``hit the debit spread'' would be as follows:

------------------------------------------------------------------------
                                    Change to
     Change to price field        quantity field          Results
------------------------------------------------------------------------
None..........................  None.............  Full execution of
                                                    spread order at
                                                    spread price.

[[Page 31038]]

 
None..........................  Lower............  Partial execution of
                                                    spread order at
                                                    spread price.
None..........................  Higher...........  Full execution of
                                                    original spread
                                                    order at spread
                                                    price and book new
                                                    credit spread at
                                                    spread price with
                                                    remaining quantity.
Lower.........................  None.............  Full execution of
                                                    spread order at the
                                                    original spread
                                                    price.
Lower.........................  Lower............  Partial execution of
                                                    spread order at
                                                    original spread
                                                    price.
Lower.........................  Higher...........  Full execution of
                                                    spread order at the
                                                    original spread
                                                    price and new credit
                                                    spread order at the
                                                    lower price with
                                                    remaining quantity
                                                    that could either
                                                    execute against
                                                    lower debit spread
                                                    orders, if any, or
                                                    be booked.
Higher........................  Any..............  No execution, book
                                                    new credit new
                                                    spread order at
                                                    entered price.
------------------------------------------------------------------------

    1. Take the Credit Spread. If the credit spread were no longer 
available for trading (e.g., because the credit spread had been traded 
by another trader), the System would book the new spread order (i.e., 
the order entered to trade the spread) as a GTC debit spread order. If 
the credit spread were still available, the results of the trader's 
attempt to ``take the credit spread'' would be as follows:

------------------------------------------------------------------------
                                    Change to
     Change to price field        quantity field          Results
------------------------------------------------------------------------
None..........................  None.............  Full execution of
                                                    spread order at
                                                    spread price.
None..........................  Lower............  Partial execution of
                                                    spread order at
                                                    spread price.
None..........................  Higher...........  Full execution of
                                                    spread order at
                                                    spread price and
                                                    book new debit
                                                    spread order at
                                                    spread price with
                                                    remaining quantity.
Higher........................  None.............  Full execution of
                                                    spread order at the
                                                    original spread
                                                    price.
Higher........................  Lower............  Partial execution of
                                                    spread order at
                                                    original spread
                                                    price.
Higher........................  Higher...........  Full execution of
                                                    spread order at the
                                                    original spread
                                                    price and new debit
                                                    spread order with
                                                    remaining quantity
                                                    that could either
                                                    execute against
                                                    higher credit spread
                                                    orders, if any, or
                                                    be booked.
Lower.........................  Any..............  No execution, book
                                                    new debit spread
                                                    order at entered
                                                    price.
------------------------------------------------------------------------

k. Intermarket Price Protection
    When CBOE direct is enabled to provide such protection, public 
customer orders would not be automatically executed at prices inferior 
to the best bid or offer on another national securities exchange, as 
those best prices would be identified by the System. The System would 
allow the SBT DPM/LMM\37\ to specify its parameters for automatic step-
up, perform the automatic step-up when the NBBO was away, and send 
orders away to the NBBO exchange. The SBT DPM/LMM could establish 
different parameters for different classes to which it had been 
assigned. CBOE has represented that it would not trade any multiply 
listed options on the System unless the Exchange had procedures to 
handle executions that occur at prices inferior to the best bid or 
offer on another national securities exchange, as those best prices are 
identified by the System.\38\
---------------------------------------------------------------------------

    \37\ In the original draft notice, CBOE discussed the handling 
of orders when there are better prices on away markets only with 
respect to SBT DPMs. CBOE has confirmed that this discussion also 
applies to SBT LMMs. Telephone conversation between Angelo 
Evangelou, Legal Division, CBOE, and Michael Gaw, Division, 
Commission, on November 16, 2001.
    \38\ The Commission notes that the proposed rule change does not 
address how the System (or SBT DPM/LMMs assigned to option classes 
on the System) would handle orders when there is a better price in 
another market. CBOE has advised that, initially, CBOEdirect will be 
employed to trade only option classes that are not multiply listed; 
consequently, it does not need to address this issue at this time. 
CBOE has represented that, to comply with its obligations under the 
Linkage Plan Order, see Securities Exchange Act Release No. 43086, 
65 FR 48023 (August 4, 2000); Securities Exchange Act Release No. 
43573 (November 16, 2000), 65 FR 70851 (November 28, 2000); 
Securities Exchange Act Release No. 43574 (November 16, 2000), 65 FR 
70850 (November 28, 2000), it would amend the CBOEdirect rules to 
address better prices on other markets prior to employing the System 
to trade multiply listed option classes. Telephone conversation of 
April 5, 2002.
---------------------------------------------------------------------------

l. Market Maker Obligations and Benefits
    Option classes would be assigned to SBT Market Makers in the same 
way they are assigned today in the open outcry system. It is possible, 
however, that different members would be assigned to be the SBT DPM for 
the same option class for different trading sessions (i.e., an SBT DPM 
could be assigned to a particular option class in one trading session 
but not another). Also, the appropriate Market Performance Committee 
could appoint SBT LMMs on a rotating basis such that the SBT LMM 
assigned to a particular option class for a particular trading session 
would rotate between two or more SBT LMMs after a designated period of 
time.
    Unlike in open outcry, there would not necessarily be a continuous 
quoting obligation; however, also unlike in open outcry, the majority 
of market makers logged onto the System would be required to provide 
their own independent quote in response to a specified percentage of 
RFQs. CBOE anticipates that active products would be quoted 
competitively and continuously by multiple market makers while inactive 
products would be quoted through RFQs. The appropriate Market 
Performance Committee would have the authority to recommend, and the 
board of directors of the Exchange to vary, the RFQ response rates to 
ensure that quality markets were available before an order executed. In 
addition, as stated earlier, the appropriate Market Performance 
Committee or two Trading Officials could exempt SBT Market Makers from 
the requirement to respond to RFQs and to provide opening quotes if the 
System were being used during a time when there was little liquidity in 
the underlying securities (i.e., during an ETH session).
i. Market-Maker Obligations
    In addition to the other market maker obligations set forth in 
proposed CBOE Rule 44.4, a Standard SBT Market Maker would be obligated 
to respond to a designated percentage of RFQs for the series in its 
assigned classes. The appropriate Market Performance Committee would 
decide the applicable percentage. In addition, an SBT DPM/LMM would be 
obligated, among other things, to provide opening quotes for all series 
in assigned classes and to respond to a certain percentage of RFQs (as

[[Page 31039]]

determined by the appropriate Market Performance Committee) for the 
series in assigned classes.
    RFQ Response Rate. For each series that an SBT Market Maker had 
been obligated to quote via RFQ, the System would calculate at the end 
of the day the market maker's RFQ response rate. The response rate 
would be computed as the number of times the market maker responded 
with an acceptable quote within a designated number of seconds (as 
determined by the SBT Trading Committee), divided by the number of RFQs 
to which the market maker was obligated to respond, expressed in 
percentage terms.
    The appropriate Market Performance Committee would set the 
percentage of RFQs to which a market maker would be required to respond 
to ensure that a high quality of markets were available before any 
order was executed. CBOE anticipates that the Market Performance 
Committee would establish the RFQ response rate at a fairly high 
percentage, although it is likely to be much lower during an ETH 
session. To be credited toward a market maker's percentage requirement, 
the following requirements would have to be met: (1) The market maker 
must respond to the RFQ within a designated number of seconds (as 
established by the appropriate Market Performance Committee); (2) the 
quote width must be equal or narrower than the prescribed legal width 
market (as it may have been adjusted by the appropriate Market 
Performance Committee); (3) the quote size must be at least equal to 
the specified minimum size (established by the appropriate Market 
Performance Committee); and (4) the SBT Market Maker must provide a 
continuous market for 30 seconds, unless the SBT Market Maker's quote 
is filled in the meantime. The market maker could change its quote 
during this period but could not cancel it if the quote were to count 
toward the market maker's RFO percentage response requirement.
    The System would send duplicate RFQs, which are RFQs for a series 
for which an RFQ was outstanding. Duplicate RFQs would be sent in order 
to give the SBT Market Maker an indication of the increasing level of 
interest in the product. SBT Market Makers would not be obligated to 
respond to each duplicate RFQ for a particular series in order to 
satisfy their percentage response requirement. The SBT Market Maker 
would be obligated to respond only once to the group of duplicate RFQs. 
For example, if two RFQs for a series were sent by the System within 
the life of the initial RFQ, there would be the first RFQ and two 
duplicates. The SBT Market Maker would be obligated to respond only 
once to all three to satisfy its percentage response requirement with 
respect to all three.
    RFQ responses (i.e., quotes) would be submitted to the SBT Book and 
exposed as they arrived.
    The RFQ response rate would be calculated on a daily basis and 
cumulated over the evaluation period (weekly, monthly, or quarterly).
    To avoid the unreasonable use of the RFQ process and in order to 
maintain reasonable loads on the System capacity, the System would 
monitor the ratio of RFQs to trades generated by each trader. CBOE has 
stated that it might impose a non-discriminatory charge per RFQ above a 
certain ratio.\39\
---------------------------------------------------------------------------

    \39\ See Securities Exchange Act Release No. 45075 (November 16, 
2001), 66 FR 59038 (November 26, 2001) (SR-CBOE-2001-57) 
(establishing fees for excessive RFQs). But see Securities Exchange 
Act Release No. 45231 (January 3, 2002), 67 FR 1382 (January 10, 
2002) (rescinding SR-CBOE-2001-57).
---------------------------------------------------------------------------

ii. Market Maker Benefits
    Both Standard SBT Market Makers and SBT DPMs/LMMs could be entitled 
to a reduction in fees for market data regarding, for example, book 
depth and underlying security data. SBT DPMs/LMMs also could receive 
the additional benefit of a trade participation right for trades done 
at their quoted bid or offer.
m. Quote Entry
    SBT Market Makers could enter quotes in two ways: manually or 
through an autoquote facility. A quote would exist as a pair of bid and 
ask day orders in the SBT Book. An SBT Market Maker could have only a 
single quote for any particular option series (i.e., the System would 
process a new quote as a cancel/replace of the old quote). An SBT 
Market Maker could, however, enter other orders in the same series for 
which it had a quote.
    The System would recognize and remember which orders were plain 
orders (i.e., unrelated to quotes) and which orders were part of a 
quote. Distinguishing between quotes and orders in this manner would 
allow the System to monitor how SBT Market Makers were fulfilling their 
obligation to respond to RFQs and also would allow for quotes to be 
regenerated automatically as described below.
    In the special case where an SBT Trader had half a quote in the 
market (i.e., its bid or ask had been hit) and it wanted to keep the 
remaining side, the System would allow the market maker to update only 
the missing side. In the case where the market maker was updating only 
one side of a quote, the System would allow the market maker to enter a 
quote with one side updated and the other side unchanged, and update 
only the changed side. In these two cases, the market maker might not 
want to replace the bid/ask it already had in the market because that 
order had price/time priority.
n. Quote Maintenance
    An SBT Market Maker would have the following functional 
capabilities for maintaining its quotes in the SBT Book: (1) Cancel a 
specific quote; (2) cancel all of its quotes in a specified class, or 
all quotes in all classes; (3) cancel/replace or update an existing 
quote; and (4) inactivate its quotes for a certain period of time. An 
update would not necessarily cause the order to lose its priority 
position. An order would be considered to have undergone a cancel/
replace if its position had changed due to a price change or quantity 
increase.
    Depending on how a quote was modified, the order's position could 
change as follows:
    1. If the price were changed, the changed side would lose priority 
position and the order would go behind all orders at the same price.
    2. If one side's quantity were changed, the unchanged side would 
retain priority position.
    3. If the order's quantity were decreased, the order would retain 
position.
    4. If the order's quantity were increased, the order would lose 
position and the order would go behind all orders at the same price.
    Cancel a Quote. If the cancel arrived in the SBT Book after one or 
both sides of the quote had been partially executed, the System would 
cancel the remainder and return a ``too late to cancel'' message for 
the filled quantity.
    Inactivate All Quotes. There is a difference between canceling 
quotes and inactivating quotes. ``Cancel'' would permanently delete the 
SBT Market Maker's quotes from the SBT Book. ``Inactivate'' would 
remove the SBT Market Maker's quotes temporarily from the SBT Book 
without deleting them. CBOE anticipates that the System ultimately 
would provide for such orders to be available for a specified time for 
``activation'' or re-submission to the SBT Book without manual re-
entry.
    Quote Risk Monitor Function. CBOE believes that the quote risk 
monitor function would provide benefits to both the customers and SBT 
Market Makers. For the customer, CBOE expects that markets would be 
deeper and more liquid--with quotes of larger size and more market 
makers providing quotes--because market makers would have

[[Page 31040]]

better control of their risk and, therefore, would be more willing to 
quote aggressively. SBT Market Makers would be able to control their 
risk after they had traded a certain number of contracts.
    CBOE has stated that SBT Market Makers that would provide quotes on 
the System would be exposed to certain types of risks different than 
those who trade in open outcry. For example, a market maker on 
CBOEdirect could have a large number of its bids hit by a set of 
incoming orders within a few seconds if the bids were the best 
available or close to the best available. The market maker could, thus, 
be subject to taking on a large position before it could react and 
change its quotes. In open outcry, a market maker is often better able 
to manage its risk because it can change its market at the point that 
it believes that the orders that have been traded on one side of the 
market justify such a move.\40\
---------------------------------------------------------------------------

    \40\ CBOE has noted that, to the extent there is an automatic 
execution system (e.g., RAES) that is available in the open outcry 
market, the market makers logged onto the automatic execution system 
are subject to the same kind of risks as market makers on an SBT 
System.
---------------------------------------------------------------------------

    To encourage market makers to provide deep and liquid markets on 
CBOEdirect, the quote risk monitor feature would automatically delete a 
market maker's quotes from a class when the System determined that its 
resting orders (quotes) had been filled within a defined period of time 
(e.g., the most recent ten-second period) for a defined number of 
contracts. When the System deletes a market maker's quotes in a 
particular class, the System would notify the market maker to give it a 
chance to react and update its quotes.
    In determining whether to delete a particular market maker's quotes 
pursuant to this feature, the System would consider only trades with 
the market maker's resting quotes, not trades that the market maker had 
initiate by hitting a bid or taking an offer. The function also would 
take effect even if the incoming orders were uncoordinated (i.e., 
coming from one or more sources). The time period within which the 
trade takes place and the net contract volume would be configurable by 
the SBT Market Maker for each class.
    Automatic Quote Regeneration. CBOEdirect has been designed to allow 
for an SBT Market Maker's quotes to be automatically regenerated, 
although this feature is not yet available as part of the CBOEdirect 
pilot program.\41\ This feature would make certain that an SBT Market 
Maker could maintain continuous quotes in the System and retain 
priority for those quotes not traded. The SBT Market Maker would be 
able to request the System to regenerate its quote when its bid or 
offer had been filled. The System would regenerate a new quote where 
the bid/offer was a pre-defined number of ticks worse than the prior 
bid/offer that was filled, and the size for the bid/offer would be the 
default size that the market maker had established.
---------------------------------------------------------------------------

    \41\ E-mail from Angelo Evangelou, Legal Division, CBOE, to 
Michael Gaw, Division, Commission, dated April 25, 2002.
---------------------------------------------------------------------------

    When a bid/offer is regenerated, the System would keep the opposite 
side at the same price unless the resulting spread would be wider than 
the prescribed legal width market. If the resulting spread was wider 
than the Exchange-prescribed width, the System would adjust the 
opposite side's price (i.e., cancel/replace the old order) to keep the 
same spread before the regeneration, or adjust it to bring the spread 
to the legal width market. The market maker would have to make this 
choice as a pre-defined selection when it specifies its defaults for 
quote regeneration.
    Except under one circumstance, the System would position the 
regenerated quote based on price/time priority. This exception would 
provide for the regenerated quote to move ahead of other orders in 
priority position. If the regenerated quote (order) could immediately 
execute against the same order that traded against the original quote, 
that portion of the regenerated quote (order) equal to the original 
size executed would go ahead of all orders at the regenerated price and 
would be executed. The System would position the rest of the 
regenerated quote based on price/time priority.
    Example. Assume the System receives a market order for 20 contracts 
that is traded against a quote for 5 contracts at a bid of 5.50. The 
market order still has 15 contracts left to be filled. There are no 
other resting orders at the execution price. The regenerated bid for 10 
(i.e., the default quote size for the market maker who had bid at 5.50) 
is at the next lower price, 5.45 with other standing orders. The 
portion of the regenerated bid that is equal to the original execution 
size (i.e., 5) is placed ahead of all orders at the regenerated price 
and receives first execution priority. The remaining portion of the 
regenerated bid (i.e., 5) is positioned behind all other resting orders 
at 5.45.\42\
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    \42\ This example has been corrected slightly from the example 
provided in Exhibit 1 of Amendment No. 1 to reflect decimalized 
rather than fractional prices. E-mail from Angelo Evangelou, Legal 
Division, CBOE, to Michael Gaw, Division, Commission, dated November 
16, 2001.
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    Managing Autoquote Traffic. Proposed CBOE Rule 44.6 would provide 
that the Exchange may limit the number of market makers that may access 
CBOEdirect through an API, or the number of messages sent by market 
makers accessing the System through an API, in order to protect the 
integrity of the System. In addition, CBOE has proposed to be able to 
impose restrictions on the use of a computer connected through an API 
if it believed such restrictions were necessary to ensure the proper 
performance of the System. CBOE has represented that these proposed 
restrictions are not intended to permit the Exchange to discriminate 
against certain traders but would be used pursuant to some objective 
measure to limit the messages sent through the API, if necessary.
    CBOE does not intend to allocate bandwidth to each SBT Trader 
(i.e., the System would not programmatically limit the number of 
messages that a trader may send). To minimize the potential of a 
particular SBT Trader from unnecessarily burdening the System, CBOE has 
proposed to be able to do one or both of the following: (1) Specify the 
number of quotes over a certain time period that may be sent free by an 
SBT Trader, or (2) impose a fee per message for sending a number that 
is clearly above the free number and for producing a ratio of quotes to 
trades over a certain time period that is higher than what would be 
considered a reasonable ratio.\43\ For example, assume that the free 
number is 4,000 quotes per class per day and the reasonable ratio of 
quotes to trades is 50:1. A fee might be assessed such that an SBT 
Market Maker is charged for every quote above 4,000 if the ratio is 
between 56:1 and 65:1, and two pennies per message if the ratio is 
between 66:1 and 75:1, etc. CBOE believes that this fee would provide 
an incentive to market makers to provide aggressive and narrow quotes 
that are likely to trade against orders sent to the System. This fee 
would, therefore, supplement the market maker quote obligations by 
providing for market makers not only to provide quotes but also to 
ensure their quotes are reasonably likely to trade.
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    \43\ The Commission notes that any proposed rule change relating 
to fees must be filed with the Commission pursuant to Section 19(b) 
of the Act, 15 U.S.C. 78s(b). After such a filing has been made, the 
Commission would consider whether the proposed fee was consistent 
with the Act.
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    CBOE also may implement a message throttle in the API to further 
limit the potential harm to the System from quote traffic. CBOE has 
represented that any measures used to throttle quotes or to limit 
quotes would be objective

[[Page 31041]]

measures imposed in a non-discriminatory manner.
o. Order Entry
    All SBT Traders, including SBT Market Makers, would be able to 
enter orders for any class. These orders would be plain orders, handled 
differently by the System from orders that are part of market maker 
quotes.
    Order Status and Maintenance. An SBT Market Maker would have the 
capability to display the status of its active orders (submitted to the 
SBT Book), both regular and quote-related orders. It also would have 
the capability to keep orders in the System that were inactive (i.e., 
not in the SBT Book). An SBT Market Maker could inactivate some or all 
of its quotes but keep them in the System so it could activate them 
again when it wanted to get back into the market.
    Spread Order Entry. Any SBT Trader would have the capability to 
enter spread orders. The System would support spread orders whose legs 
were options of the same underlying security. The System would provide 
support for the most common, two-legged spread orders: vertical, combo, 
straddle, and time. The System also would allow a market maker to enter 
a customized spread order with more than two legs. The System would 
calculate and display the current bid and offer for the spread with a 
net credit or debit indication, if a market were available for each 
leg.
p. SBT Brokers
    An SBT Broker would be an individual (either a member or a nominee 
of a member organization) who was registered with the Exchange for the 
purpose of accepting and executing orders received from members, 
registered broker-dealers, or public customers on CBOEdirect. As with 
brokers operating in the Exchange's auction market, an SBT Broker would 
not be permitted to accept an order from any source other than a member 
or a registered broker-dealer, unless it were either the nominee of, or 
had registered its individual membership for, a member organization 
approved to transact business with the public in accordance with CBOE 
Rule 9.1.
    SBT Brokers would have the same obligations as brokers on the 
Exchange's auction market to use due diligence in the representation of 
orders for which they were agent. SBT Brokers and Proprietary Traders 
could use the SBT workstations or API to perform the following 
functions:
     Enter, cancel, cancel/replace, and maintain orders;
     Hit bids and take offers;
     Submit RFQs;
     Enter cross notifications and cross execution orders; and
     Set up defaults or preferences.
    The Exchange could provide other means for the submission of orders 
or other functions other than through the use of the SBT workstations 
or API.
q. Clearing Firm Brokers
    Proposed CBOE Rule 45.11 would govern the functions of Clearing 
Firm Brokers. A Clearing Firm Broker would be an individual who 
represented the Clearing Firm of a particular SBT Market Maker and had 
the authority to take certain actions with respect to that SBT Market 
Maker's use of the SBT System.
    A Clearing Firm Broker could request the CBOE Help Desk to force 
the logout of a trader when, for example, that trader had financial 
difficulty. The forced logout of a trader also could be necessary when 
the trader is having technical difficulties that prevent the trader 
from logging off on his or her own. The System would provide two 
options for logging out an SBT Trader: (1) Force logout, and (2) force 
logout and disable. ``Force logout'' would log out the trader, cancel 
all of the trader's quotes, leave the trader's regular orders 
unchanged, and would not affect the trader's ability to log in. This 
option would be used for situations where the trader could not log out 
on his or her own for any reason. ``Force logout and disable'' would 
log out the trader, cancel all of the trader's quotes, cancel all the 
trader's regular orders, and de-authorize the trader as a user. The 
Help Desk would have to re-enable the trader before he or she could log 
in again under this second option. In this case, the Clearing Firm 
could have another trader trade the logged out trader's account for 
some period of time to manage the positions.
r. Data Dissemination
    Internal Dissemination of Quote and Best Bid and Offer. CBOEdirect 
would disseminate the best bid and offer internally. As each new limit 
order (whether as an order or as part of a market maker quote) was 
entered into the SBT System, the best bid and offer displayed in the 
System would be updated to the extent the new bid or offer changed the 
previously displayed bid or offer. The System would send quote/order 
information--series, price, size, and order source (market maker, 
customer, or non-customer professional order)--to the SBT workstations 
that were trading a given class. The System also would provide the 
current best bid or offer in any other market as such best bids and 
offers were identified in the System.
    Internal Dissemination of Price/Last Sale. CBOEdirect would 
disseminate internally to SBT Market Makers appointed to a given class, 
and to all subscribers' workstations that have indicated interest in a 
given class, last sale information including series, price, and size.
    Booked Order Dissemination. When an SBT Trader or subscriber 
requests market data for an option class, CBOEdirect would provide the 
SBT Book's best bids, asks, and their total volumes for each series of 
the class requested. The data also would include the last sale, day's 
trade volume, and the SBT Trader's orders for each series. CBOE could 
delete or add information to the market data disseminated as it deemed 
appropriate. The market data would be accessible to any SBT Trader, 
although the Exchange could charge varying fees to different categories 
of traders for access to the information.
    Book Depth Data. Upon request, traders could access from the System 
market depth information, including the aggregate size and the number 
of contracts at each price. CBOE could charge fees for access to this 
information. The information might not be provided upon request if the 
Exchange believed that it could lead to degradation of the System.
    Dissemination to OPRA. CBOEdirect would disseminate quote and 
trader (i.e., last sale) information externally to OPRA and/or to some 
other distribution network to the extent permitted by agreement or by 
rule. Series, price, and size would be disseminated for trades. Series 
and price would be disseminated for quotes. Quote size also would be 
disseminated if OPRA were capable of accepting quotes with size. Every 
best book bid/ask change would generate a quote report to OPRA and/or 
some other network. The CBOEdirect quote might not have a bid/ask 
spread that was equal to or narrower than the Exchange-prescribed 
spread because two unrelated orders, separated by more than the 
Exchange-prescribed spread, might be the best orders, causing the 
System to send their prices as the best quote. Changes in best quote 
and size due to AON or FOK contingency orders would not update quotes 
in OPRA. CBOE has stated that it would notify recipients that 
information sent over the System to SBT workstations would be 
considered proprietary information of the Exchange and could not be 
distributed or shared without written permission of the Exchange.

[[Page 31042]]

2. Statutory Basis
    CBOE believes the proposed rule change would provide for a fair and 
innovative electronic medium for the trading of securities options that 
will be registered by the established procedures and personnel of the 
Exchange. Accordingly, CBOE believes that the proposed rule change is 
consistent with Section 6(b) of the Act \44\ in general, and furthers 
the objectives of Section 6(b)(5) \45\ in particular, in that it is 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
to protect investors and the public interest.
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    \44\ 15 U.S.C. 78f(b).
    \45\ 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 would impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

C. Self-Regulation 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 with 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 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. In particular, the 
Commission requests commenters to address the proposed trade 
nullification procedures, crossing procedures, and allocation 
methodologies, especially the proposal that customer orders may not 
necessarily be accorded the highest priority. 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. 
SR-CBOE-00-55 and should be submitted by May 29, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-11098 Filed 5-7-02; 8:45 am]
BILLING CODE 8010-01-P