[Federal Register Volume 68, Number 17 (Monday, January 27, 2003)]
[Notices]
[Pages 3907-3909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1706]



[[Page 3907]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47200; File No. SR-CBOE-2002-63]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendments Nos. 1 and 2 
Thereto by the Chicago Board Options Exchange, Inc. Proposing To Allow 
Limited Side-by-Side Trading and Integrated Market Making for Certain 
Securities and Their Related Options

January 15, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 16, 2002, the Chicago Board Options 
Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Exchange filed Amendment No. 1 to the 
proposed rule change on December 27, 2002.\3\ The Exchange filed 
Amendment No. 2 to the proposed rule change on January 2, 2003.\4\ 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\ On December 27, 2002, the Exchange filed a Form 19b-4, which 
replaced the original filing in its entirety (``Amendment No. 1''). 
In Amendment No. 1, the Exchange withdrew the portion of the 
proposed rule change to permit limited integrated market making of 
securities admitted to dealings on an UTP basis and their related 
options if information barriers are established, approved and 
maintained. In addition, the Exchange amended the proposal to 
designate the proposed rule change as filed under section 19(b)(3), 
rather than section 19(b)(2), of the Act.
    \4\ See letter from Christopher Hill, Attorney, CBOE, to Nancy 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated December 30, 2002 (``Amendment No. 
2''). In Amendment No. 2, the Exchange provided reasons for 
requesting that the Commission waive the 5 day pre-filing 
requirement and the 30 day delay of the operative date as required 
under section 19(b)(3) of the Act, and Rule 19b-4(f)(6) thereunder.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Exchange rules and the related 
Interpretations and Policies to allow for limited ``Side-by-Side 
Trading'' \5\ and ``Integrated Market Making'' \6\ for certain 
securities and their related options. The text of the proposed rule 
change follows. Additions are in italics. Deleted text is in 
[brackets].
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    \5\ The Exchange defines ``Side-by-Side Trading'' as the trading 
of options and their underlying stocks in the same vicinity, though 
not necessarily by the same DPM or firm.
    \6\ The Exchange defines ``Integrated Market Making'' as the 
trading of options and their underlying stocks by the same DPM.
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* * * * *

Chapter XXX

Part A--Trading in Stocks, Warrants, and Other Securities

General Floor Prohibitions
    Rule 30.18. No member of the Exchange, while on the floor, shall:
    (a) Dealing When Option Granted or Held. Except as otherwise 
provided in Section (d) below, [I]initiate the purchase or sale on the 
Exchange of any security subject to the Rules in this Chapter, for his 
own account or for any account in which he, his member organization or 
any person associated with such member or member organization is 
directly or indirectly interested, including by means of the issuance 
or acceptance of a commitment or obligation to trade, where (i) such 
member holds, or has sold or granted, an option or warrant on that 
security, or (ii) such member has knowledge that his member 
organization or any person associated with such member or member 
organization holds, or has sold or granted, any such option or warrant; 
or
    (b) No change.
    (c) No change.
    (d) Notwithstanding the foregoing:
    (i) The DPM or an associated person of the DPM for an IPR, IPS, or 
TIR that meets the criteria set forth in Interpretation and Policy .03 
of this Rule may act as a DPM, market-maker, and/or floor broker in the 
related options without implementing procedures to restrict the flow of 
information between them and without any physical separation between 
the trading in the underlying IPR, IPS, or TIR and the trading in the 
related options.
    (ii) Reserved.
* * *Interpretations and Policies
    .01 No change.
    .02 No change.
    .03 The criteria to qualify particular IPRs, IPSs and TIRs for 
side-by-side trading and integrated market making pursuant to Exchange 
Rule 30.18(d)(i) are as follows:
    a. Component securities that in the aggregate account for at least 
90% of the weight of the portfolio must have a minimum market value of 
at least $75 million.
    b. The component securities representing 90% of the weight of the 
portfolio each have a minimum monthly trading volume during each of the 
last six months of at least 250,000 shares.
    c. The most heavily weighted component security cannot exceed 25% 
of the weight of the portfolio and the five most heavily weighted 
component securities cannot exceed 65% of the weight of the portfolio.
    d. The underlying portfolio must include a minimum of 13 
securities.
    e. All securities in the portfolio must be listed on a national 
securities exchange or the NASDAQ Stock Market.
Chapter 30
    30.18A. An option DPM that is also approved as a DPM in the 
underlying security in a side-by-side trading environment pursuant to 
Exchange Rule 30.18(d)(i) is required to disclose on request to all 
participants in the option or security trading crowds information about 
aggregate buying and selling interest at different price points 
represented by limit orders then being represented or otherwise held by 
the DPM.
* * *Interpretations and Policies
    .01. ``Side-by-side trading'' refers to the trading of options and 
their underlying securities in the same physical vicinity, though not 
necessarily by the same DPM or firm.
    .02. Notwithstanding the fact that a DPM's option transactions may 
be in conformity with Rule 30.18 and its Interpretations and Policies, 
such DPM shall nonetheless be deemed to be in violation of Rule 30.18 
if the DPM has engaged in such option transactions for manipulative 
purposes.

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

    In its filing with the Commission, the Exchange 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 III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 3908]]

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

1. Purpose
    Since at least the 1980s,\7\ the Commission has expressed concerns 
regarding potential information advantages and potential opportunities 
for manipulation that might occur if specialists and market makers 
could engage in side-by-side trading and integrated market making.
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    \7\ See Securities Exchange Act Release No. 26147 (October 3, 
1988), 53 FR 39556).
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    In October of 1990, the Commission approved CBOE rules governing 
the trading of stocks, warrants, and other securities at CBOE (which 
are now set forth in Chapter 30 of the CBOE's Rules).\8\ During the 
process of obtaining this approval, CBOE noted to the Commission that 
no side-by-side trading of stocks and stock options would occur on the 
same floor, and agreed to submit a proposed rule change under section 
19(b) of the Act \9\ to the Commission ``prior to any modification to 
its plan to trade stocks in a separate location from the options 
trading floor.'' \10\ In addition, Exchange Rule 30.18(a), as proposed 
by the CBOE and approved by the Commission, was ``intended to prevent a 
member from buying or selling an underlying stock on the CBOE when the 
member or an affiliate has a position in an option or warrant on that 
security.'' \11\
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    \8\ See Securities Exchange Act Release No. 28556 (October 19, 
1990), 55 FR 43233 (October 26, 1990) (approving SR-CBOE-90-08).
    \9\ 15 U.S.C. 78s.
    \10\ See id. at 16 and nn. 30-31 (citing letter from Robert 
Ackerman, Vice President, CBOE, to Howard Kramer, Assistant 
Director, Division, Commission, dated October 15, 1990).
    \11\ See Securities Exchange Act Release No. 30068 (December 12, 
1991), 56 FR 65764 (December 18, 1991) (approving File No. SR-CBOE-
91-45).
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    Since that time, the core of the CBOE's business has remained 
primarily in listed options on equities and stock indexes. In recent 
years, however, the CBOE, in addition to its existing listed options 
business, has also come to trade a number of products that derive their 
value from portfolios of other equity securities. These products 
include among others, Index Portfolio Receipts (``IPRs'')\12\ and 
``Index Portfolio Shares (``IPSs''),\13\ which are sometimes 
collectively referred to as Exchange-Traded Funds (``ETFs''),\14\ as 
well as Trust Issued Receipts (``TIRs'').\15\
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    \12\ As set forth in Interpretation .02 to CBOE Rule 1.1, the 
term index portfolio receipts or ``IPRs'' means securities that (a) 
represent an interest in a unit investment trust (``Trust'') which 
holds the securities that comprise an index on which a series of 
IPRs is based; (b) are issued by the Trust in a specified aggregate 
minimum number in return for a ``Portfolio Deposit'' consisting of 
specified numbers of shares of stock plus a cash amount; (c) when 
aggregated in the same specified minimum number, may be redeemed 
from the Trust which will pay to the redeeming holder the stock and 
cash then comprising the Portfolio Deposit; and (d) pay holders a 
periodic cash payment corresponding to the regular cash dividends or 
distributions declared and paid with respect to the component 
securities of the stock index on which the IPRs are based, less 
certain expenses and other charges as set forth in the Trust 
prospectus. IPRs are ``UIT interests'' within the meaning of the 
Rules of the Exchange.
    \13\ As set forth in Interpretation .03 to CBOE Rule 1.1, the 
term ``Index Portfolio Shares'' or IPSs means securities that (a) 
are issued by an open-end management investment company based on a 
portfolio of stocks designed to provide investment results that 
correspond generally to the price and yield performance of a 
specified foreign or domestic stock index; (b) are issued by such an 
open-end management investment company in a specified aggregate 
minimum number in return for a deposit of specified number of shares 
of stock and/or a cash amount with a value equal to the next 
determined net asset value; and (c) when aggregated in the same 
specified minimum number, may be redeemed at a holder's request by 
such open-end management investment company which will pay to the 
redeeming holder stock and/or cash with a value equal to the next 
determined net asset value.
    \14\ For ease of reference, this rule filing uses the term 
Exchange-Traded Fund, or ETF, to describe both IPRs and IPSs. 
Currently, the Exchange trades the following ETFs listed on the CBOE 
pursuant to CBOE Rule 31.5(L)-(M); the Nasdaq 100[reg] Index 
Tracking Stock (``QQQ''), the Standard & Poor's[reg] Depository 
Receipts (SPY-SPDRs[reg]), and the S&P 100 iSharesSM 
(``OEF''). See email from Christopher Hill, Attorney, CBOE, to 
Christopher Solgan, Attorney, Division, Commission, dated November 
12, 2002.
    \15\ As set forth in Interpretation and Policy .04 to CBOE Rule 
1.1, the term ``Trust Issued Receipt'' means a security (a) that is 
issued by a trust (``Trust'') which holds specific securities 
deposited with the Trust; (b) that, when aggregated in some 
specified minimum number, may be surrendered to the Trust by the 
beneficial owner to receive the securities; and (c) that pays 
beneficial owners dividends and other distributions on the deposited 
securities, if any are declared and paid to the trustee by an issuer 
of the deposited securities. TIRs are listed on the CBOE pursuant to 
CBOE Rule 30.57.
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    More recently, the Commission approved the American Stock Exchange 
LLC (``Amex'') filing SR-Amex-2002-21, which authorized the Amex to 
permit limited integrated market making in its stocks that trade 
pursuant to unlisted trading privileges (``UTP'') and their related 
options, as well as both integrated market making and side-by-side 
trading in certain ETF shares and TIRs and their related options.\16\
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    \16\ See Securities Exchange Act Release No. 46213 (July 16, 
2002), 67 FR 48232 (July 23, 2002) (approving SR-Amex-2002-21).
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    CBOE expressed concerns about the Amex proposal for side-by-side 
trading set forth in SR-Amex-2002-21 and the earlier SR-Amex-2001-
75.\17\ Furthermore, the CBOE belives the Commission's recent approval 
of SR-AMEX-2002-21, including both the ability to undertake limited 
side-by-side trading as well as limited integrated market-making, gives 
substantial competitive advantages to the Amex. Thus, in the interests 
of promoting a fair and competitive marketplace, the CBOE proposes to 
undertake integrated market making and side-by-side trading of ETFs and 
their related options to the same extent that the Commission has 
approved for the Amex.
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    \17\ See letter from Edward J. Joyce, President and Chief 
Operating Officer, CBOE, to Jonathan Katz, Secretary, Commission, 
dated July 11, 2002.
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    Specifically, CBOE proposes to permit side-by-side trading and 
integrated market making of certain ETFs and TIRs and their related 
options, if the ETF or TIR meets the criteria set forth in 
Interpretation and Policy .03 to CBOE Rule 30.18.\18\ Specifically, 
CBOE proposes to permit DPMs and market makers in options on ETF shares 
and TIRs that meet the criteria set forth in the proposed new 
Interpretation and Policy .04 to CBOE Rule 30.18 to also act as the DPM 
and market makers, respectively, in the underlying securities without 
information barriers or physical barriers. CBOE also proposes new CBOE 
Rule 30.18A to require a DPM in options on an ETF or TIR that is also 
the DPM in the underlying security in a side-by-side environment to 
disclose on request to participants in the ETF, TIR, and option trading 
crowds information about aggregate buying and selling interest at 
different price points represented by limit orders on the ETF, TIR or 
option held by the DPM.
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    \18\ The criteria for ETFs and TIRs set forth in the proposed 
Interpretation and Policy .03 to Rule 30.18 to qualify particular 
ETFs and TIRs for side-by-side trading and integrated market making 
are as follows:
    (a) Component securities that in the aggregate account for at 
least 90% of the weight of the portfolio must have a minimum market 
value of at least $75 million.
    (b) The component securities representing 90% of the weight of 
the portfolio each have a minimum monthly trading volume during each 
of the last six months of at least 250,000 shares.
    (c) The most heavily weighted component security cannot exceed 
25% of the weight of the portfolio and the five most heavily 
weighted component securities cannot exceed 65% of the weight of the 
portfolio.
    (d) The underlying portfolio must include a minimum of 13 
securities.
    All securities in the portfolio must be listed on a national 
securities exchange or the NASDAQ Stock Market.
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    The CBOE notes that it remains concerned about the potential impact 
of any further expansion of side-by-side trading. While the 
Commission's approval of SR-Amex-2002-21 compels the CBOE to make this 
proposed rule change for competitive reasons, CBOE represents that this 
proposal seeks no more side-by-side trading than what the Commission 
has approved for the Amex in SR-Amex-2002-21.

[[Page 3909]]

2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act \19\ in general and furthers the objectives of 
Section 6(b)(5)\20\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to protect investors and the 
public interest and is not designed to permit unfair discrimination 
between customer, issuers, brokers, or dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change, as amended, has become effective 
pursuant to Section 19(b)(3)(A) of the Act \21\ and subparagraph (f)(6) 
of Rule 19b-4 \22\ thereunder because it does not: (i) Significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate; and the Exchange has given the Commission 
written notice of its intention to file the proposed rule change at 
least five business days prior to filing. At any time within 60 days of 
the filing of such proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\23\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ For purposes of calculating the 60-day abrogation date, the 
Commission considers the 60-day period to have commenced on January 
2, 2003, the date CBOE filed Amendment No. 2.
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    Under Rule 19b-4(f)(6)(iii) of the Act,\24\ the proposal does not 
become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest and the Exchange is 
required to give the Commission written notice of its intention to file 
the proposed rule change at least five business days prior to filing. 
The Exchange has requested that the Commission waive the 30-day 
operative date and the five-day pre-filing notice requirement in order 
for it to implement the proposed rule change as quickly as possible. 
The CBOE contends that this proposed rule is substantially similar to 
comparable rules the Commission approved for the Amex, which was 
published for public notice and comment.\25\ As a result, the Exchange 
believes that the proposed rule change does not raise any new 
regulatory issues, significantly affect the protection of investors or 
the public interest, or impose any significant burden on competition. 
The Commission, consistent with the protection of investors and the 
public interest, has determined to waive the 30-day operative period as 
well as the five-day pre-filing notice requirement,\26\ and, therefore, 
the proposal is effective and operative upon filing with the 
Commission.
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    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ See Securities Exchange Act Release No. 46213 (July 16, 
2002), 67 FR 48232 (July 23, 2002) (approving SR-Amex-2002-21).
    \26\ For purposes only of waiving the five-day pre-filing notice 
requirement and the 30-day operative period for this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CBOE-2002-63 and should be submitted by February 18, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1706 Filed 1-24-03; 8:45 am]
BILLING CODE 8010-01-P