[Federal Register Volume 68, Number 149 (Monday, August 4, 2003)]
[Notices]
[Pages 45869-45870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19663]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48237; File No. SR-CBOE-2003-08]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated To Establish 
a Limited Pilot Program Relating to Maximum Bid/Ask Differentials

July 28, 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 February 27, 2003, the Chicago Board Options 
Exchange, Incorporated (``CBOE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'' or ``SEC'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the CBOE. On July 25, 2003, the Exchange 
submitted Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Angelo Evangelou, Senior Attorney, Legal 
Division, CBOE, to Jennifer Colihan, Special Counsel, Division of 
Market Regulation, Commission, dated July 25, 2003 (``Amendment No. 
1''). In Amendment No. 1, the Exchange revised the proposed rule 
text to indicate that the pilot program would expire on January 30, 
2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its rules to adopt a limited pilot 
program relating to maximum bid/ask differentials. The text of the 
proposed rule change is available at the Office of the Secretary, CBOE 
and at the Commission.

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. The CBOE has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
Background
    The Exchange is proposing to adopt, on a pilot basis, a limited 
exemption to the Market-Maker bid/ask differential requirements 
contained in CBOE Rule 8.7(b)(iv). More specifically, as part of 
accommodating compliance with the Plan for the Purpose of Creating and 
Operating an Intermarket Options Linkage (the ``Linkage Plan''),\4\ the 
Exchange is introducing a new ``autofade'' functionality which will 
cause one side of CBOE's disseminated quote to move to an inferior 
price when the quote is required to fade pursuant to the terms of the 
Linkage Plan and/or when the size associated with the quote has been 
depleted by automatic executions (of both Linkage orders and non-
Linkage orders).
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    \4\ The Linkage Plan was originally approved on July 28, 2000. 
See Securities Exchange Act Release No. 43086, 65 FR 48023 (August 
4, 2000).
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    Linkage orders are generally Immediate or Cancel limit orders 
priced at the National Best Bid or Offer (``NBBO'') that must be acted 
upon within 15 seconds. The Linkage Plan provides several instances in 
which a Participant receiving a linkage order must fade its quote. For 
example, if a Participant receives a Principal Acting as Agent (``PA'') 
order for a size greater than the Firm Customer Quote Size and does not 
execute the entirety of the PA Order within 15 seconds, the Participant 
is required to fade its quote. CBOE's autofade functionality will 
automate the fading process to ensure that members (and the Exchange) 
are in full compliance with this aspect of the

[[Page 45870]]

Linkage Plan. Autofade will move one side of CBOE's quote to a price 
that is 1-tick inferior to the NBBO.\5\ This will ensure that the 
Exchange will not immediately receive additional linkage orders in 
order to allow the member to refresh the quote (either manually or 
through an autoquote update).
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    \5\ The only exception is when CBOE's NBBO quote (or next best 
quote) is represented by a customer order in the book. In such 
cases, the Exchange would not fade a booked order (it would have to 
be traded).
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    As mentioned above, autofade also would apply anytime an automatic 
execution of any order via the Exchange's Retail Automatic Execution 
System (``RAES'') has depleted the size of CBOE's quote. On March 29, 
2002, the Commission approved a CBOE proposal to implement a ``quotes 
with size'' system that would enable the Exchange to disseminate 
options quotations with a size that reflects previous executions 
(decrementing quotes).\6\ A current feature of this functionality 
provides that when a quote is exhausted via automatic executions, the 
Exchange may disseminate a size of ``1'' for a specified ``reroute'' 
period during which time the Exchange's RAES system is disengaged.\7\ 
Autofade would eliminate any need to disengage the RAES system and 
disseminate a size of 1 contract at the same price. Once a quote is 
exhausted, autofade would move one side of the quote to a price that is 
one tick inferior to the NBBO (as described above).
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    \6\ See Securities Exchange Act Release No. 45676, 67 FR 16478 
(April 5, 2002).
    \7\ The reroute period can be set from 0 to 30 seconds.
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The Reason for this Rule Filing

    CBOE anticipates that there may be limited instances where the 
autofade functionality moves the quote in a manner that causes the 
quote width to widen beyond the bid/ask parameters provided pursuant to 
CBOE Rule 8.7(b)(iv). Accordingly, CBOE seeks to adopt (on a pilot 
basis) a temporary exception to the requirements of CBOE Rule 
8.7(b)(iv) in cases where the Exchange automatically adjusts one side 
of the disseminated quote to one minimum increment below (above) the 
NBBO bid (offer) and this cause the quote to exceed the quote width 
parameters of that rule. The proposed exemption period would last for 
30 seconds after any given autofade that caused a wider quote than 
allowed under CBOE Rule 8.7(b)(iv). Thus, to the extent a quote 
remained outside of the maximum width after the 30-second time period, 
the responsible broker or dealer disseminating the quote would be 
deemed in violation of CBOE Rule 8.7(b)(iv) for regulatory purposes. 
CBOE proposes that the pilot run until January 30, 2004.
2. Statutory Basis
    The proposed rule change will, among other things, allow the 
Exchange to comply more easily with the requirements of the Linkage 
Plan. Accordingly, the Exchange believes the proposed rule change is 
consistent with Section 6(b) of the Act \8\ in general and furthers the 
objectives of Section 6(b)(5) \9\ in particular in that it should 
promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

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

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Section. Copies of such 
filing will also be available for inspection and copying at the 
principal office of CBOE. All submissions should refer to File No. SR-
CBOE-2003-08 and should be submitted by August 25, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-19663 Filed 8-1-03; 8:45 am]
BILLING CODE 8010-01-P