[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36279-36280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12984]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45936; File No. SR-CBOE-2002-10]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Allocation of Orders for Lead Market-Makers and Supplemental Market-
Makers Logged On to the Exchange's Rapid Opening System

May 15, 2002.

I. Introduction

    On February 15, 2002, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the allocation of 
orders for Lead Market-Makers (``LMMs'') and Supplemental Market-Makers 
(``SMMs'') logged on to the Exchange's Rapid Opening System (``ROS''). 
On March 15, 2002 and March 22, 2002, CBOE submitted Amendment Nos. 1 
and 2, respectively, to the proposed rule change. The proposed rule 
change and Amendment Nos. 1 and 2 were published for comment in the 
Federal Register on April 2, 2002.\3\ The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 45640 (March 25, 
2002), 67 FR 15644 (April 2, 2002) (``Notice'').
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II. Description of Proposal

    CBOE is proposing changes to Interpretation and Policies .01 of 
CBOE Rule 6.2A (``Interpretation .01''), relating to the allocation of 
orders for LMMs and SMMs logged onto ROS.\4\ The proposed rule change 
was filed by the CBOE pursuant to subparagraph IV.B.j. of the 
Commission's Order of September 11, 2000, which requires that 
respondent options exchanges adopt new, or amend existing, rules to 
make express any practice or procedure ``whereby market makers trading 
any particular option class determine by agreement * * * the allocation 
of orders in that option class.'' \5\
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    \4\ ROS is the Exchange's automated system for opening classes 
of options at the beginning of the trading day or for re-opening 
classes of options during the trading day. See CBOE Rule 6.2A.
    \5\ See Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. Securities Exchange 
Act Release No. 43268 (September 11, 2000).
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    Currently, Interpretation .01 limits the use of ROS to LMMs and 
SMMs in S&P 100 (``OEX'') Options. The proposed rule change would 
establish that ROS may be used by LMMs and SMMs appointed pursuant to 
CBOE Rule 8.15 to conduct rotations in any options class. The proposed 
rule change would also clarify that despite CBOE Rule 6.2A(b), which 
assigns ROS contracts to trade to participating market-makers, ROS 
contracts to trade will be assigned only to the LMMs and SMMs logged 
onto ROS in crowds to which LMMs and SMMs are appointed.
    The proposed rule change would also permit the appropriate Floor 
Procedure Committee to establish a participation right for the LMM who 
determines the formula for generating automatically updated market 
quotations during the trading day and provides the primary quote feed 
for an option class during the current expiration month. This 
participation right would apply only to ROS contracts to trade, and 
would be subject to the following conditions: (1) The LMM would receive 
this participation right only during the time it is actually providing 
the primary quote feed for an option class; and (2) the LMM must log 
onto ROS the minimum number of times established by the appropriate 
Floor Procedure Committee.
    As part of the proposed rule change, the CBOE also submitted the 
draft text of a Regulatory Circular that would establish a specific 
entitlement formula for qualifying LMMs, and would be used by the 
appropriate Floor Procedure Committee to adopt the participation 
entitlement. The formula provides for participation entitlements that 
range from 34 percent to 40 percent for the LMM providing the primary 
quote feed, depending on the total number of appointed LMMs and SMMs in 
the option, when the number is three or more. If the number is two, 
each of the two will be assigned an equal portion of ROS contracts, and 
if there is only one, all ROS contracts to trade will be assigned to 
the appointed LMM or SMM.\6\
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    \6\ The Exchange has stated that changes to this Regulatory 
Circular, including changes to a participation entitlement formula, 
will be submitted to the Commission pursuant to Section 19(b) of the 
Exchange Act. See Notice.
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    In explaining the purpose of the participation guarantee, the CBOE 
stated that it has introduced a vendor quote program in OEX to replace 
the Autoquote system. The vendor system accepts a quote stream from a 
firm's proprietary quote system and then sends this quote information 
to the Trading Support System to be disseminated as market quotes. The 
CBOE believes that the LMM that provides the primary quote feed for an 
option class during the current expiration cycle provides a valuable 
service that ensures that the quotes are being updated in timely 
fashion to reflect the current state of the market.

III. Discussion

    After careful consideration, the Commission has determined to 
approve the proposed rule change.\7\ For the reasons discussed below, 
the Commission finds that the proposed

[[Page 36280]]

rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Section 6(b)(5) of the Act.\8\
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    \7\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the rules 
of an exchange, among other things, be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    In the Commission's view, it is reasonable to expand the use of ROS 
to all options classes in which LMMs and SMMs conduct rotations. The 
Commission also believes that it is reasonable to assign ROS contracts 
to trade only to the LMMs and SMMs logged onto ROS in crowds in which 
LMMs and SMMs are appointed. The Commission notes that when 
Interpretation .01 was first adopted to permit the use of ROS under the 
LMM system (at the time, for OEX options), the CBOE stated that ROS was 
not meant to supplant the LMM system, which the Exchange believed had 
added accountability to openings, but to be used as a tool by the LMM 
to facilitate openings.\9\
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    \9\ See Securities Exchange Act Release No. 4366 (December 4, 
2000), 65 FR 77943 (December 13, 2000). The CBOE also stated at the 
time that ``to the extent that market-makers want to participate in 
the opening of a series in which they do not hold LMM or SMM 
appointments, they will continue to be able to transmit written non-
cancelable proprietary and market-makers orders to the LMM in the 
appropriate zone ten minutes prior to the opening of trading, 
pursuant to the terms of Interpretation .02 to CBOE Rule 24.13.'' 
Id.
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    The Commission further believes that it is reasonable to grant a 
participation entitlement to the LMMs who provide the primary quote 
feed for an option class during an option cycle is reasonable, in view 
of the service such LMMs provide. The Commission notes that the 
proposed entitlement would never be greater than 40 percent. The 
Commission has found with respect to participation guarantees in other 
contexts that 40 percent is not inconsistent with statutory standards 
of competition and free and open markets.\10\
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    \10\ See, e.g., Securities Exchange Act Release Nos. 42455 
(February 24, 2000), 65 FR 11388 (March 2, 2000) at 11398; and 43100 
(July 31, 2000), 65 FR 48778 (August 9, 2000) at notes 96-99 and 
accompanying text.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2002-10) be, and hereby 
is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12984 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P