[Federal Register Volume 68, Number 169 (Tuesday, September 2, 2003)]
[Notices]
[Pages 52254-52256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48394; File No. SR-CBOE-2003-28]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to Open Outcry Size Guarantees

August 22, 2003.
    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 July 21, 2003, the Chicago Board Options Exchange, Inc. 
(``Exchange'' or ``CBOE'') 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. The proposed rule change has been filed by CBOE under Rule 
19b-4(f)(6) under the Act.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rules relating to open outcry size 
guarantees in those classes of options that trade on the CBOE Hybrid 
System (``Hybrid''). Below is the text of the proposed rule change. 
Proposed new language is in italics.\4\
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    \4\ The Commission notes that it added language to the rule text 
that was inadvertently omitted by CBOE. Telephone call between Steve 
Youhn, Legal Division, CBOE, and Frank N. Genco, Attorney, Division 
of Market Regulation (``Division''), Commission, on August 19, 2003.
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* * * * *

[[Page 52255]]

Rule 8.7 Obligations of Market Makers

    (a)-(c) No change
    (d) No Change
    (i) Market Maker Trades Less Than 20% Contract Volume 
Electronically: No change
    (A)-(B) No change
    (C) Continuous Open Outcry Quoting Obligation: In response to any 
request for quote by a floor broker or DPM representing an order as 
agent, market makers must provide a two-sided market complying with the 
quote width requirements contained in Rule 8.7(b)(iv) for a minimum of 
ten contracts for non-broker-dealer orders and one contract for broker-
dealer orders.
    (D) No change
    (ii) Market Maker Trades More Than 20% Contract Volume 
Electronically: No change
    (A)-(B) No change
    (C) Continuous Open Outcry Quoting Obligation: In response to any 
request for quote by a floor broker or DPM representing an order as 
agent, market makers must provide a two-sided market complying with the 
current quote width requirements contained in Rule 8.7(b)(iv) for a 
minimum of ten contracts for non-broker-dealer orders and one contract 
for broker-dealer orders.
* * * * *

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 IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    In May 2003, the Commission approved trading rules for Hybrid,\5\ a 
trading platform that alters the fundamental way in which the Exchange 
conducts business. Hybrid merges the electronic and open outcry trading 
models and offers market participants the ability to stream 
electronically their own quotes. Previously (and currently in non-
Hybrid classes), CBOE's disseminated quote represented, for the most 
part, the Designated Primary Market Maker's (``DPM'') autoquote price. 
Market makers (``MMs'') were able to affect changes to that quote in 
open outcry (or by putting up manual quotes). Hybrid offers in-crowd 
MMs and in-crowd DPMs the opportunity to submit their own firm 
disseminated market quotes that represent their own trading 
interest.\6\ In addition, Hybrid permits in-crowd floor brokers, who 
represent orders on behalf of members, broker-dealers, public 
customers, and the firm's proprietary account, to enter orders on 
behalf of their customers for display in the CBOE's best bid or offer 
(``BBO'').\7\ Whereas, prior to Hybrid, there was only one autoquote 
price comprising the CBOE disseminated quote, Hybrid allows for the 
introduction of multiple quotes in the quoting equation.
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    \5\ See Exchange Act Release 47959 (May 30, 2003), 68 FR 34441 
(June 9, 2003) (approving File No. SR-CBOE-2002-05).
    \6\ Telephone conversation between Steve Youhn, Legal Division, 
CBOE, and Kelly M. Riley, Senior Special Counsel, Division, on 
August 20, 2003.
    \7\ Id. Pursuant to CBOE Rule 6.75, floor brokers generally may 
not execute any orders for which they have been vested with the 
discretion to choose: the class of options to buy/sell, the number 
of contracts to buy/sell, or whether the transaction would be one to 
buy or sell.
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    CBOE Rules 8.7(d)(i)(C) and (d)(ii)(C), which only apply to classes 
trading on Hybrid, impose a 10-up size requirement for MMs responding 
to a request for a market in open outcry by a floor broker (``FB'') 
representing an order as agent.\8\ CBOE represents that the intent of 
CBOE Rules 8.7(d)(i)(C) and (d)(ii)(C) when adopted was to ensure that 
FBs representing public customer orders would receive a quote of 
sufficient depth whenever they requested a market in open outcry. CBOE 
believes that the plain language of CBOE Rules 8.7(d)(i)(C) and 
d(ii)(C), however, is overbroad and could be interpreted to apply to 
broker-dealer (``BD'') orders represented by FBs. Accordingly, the 
Exchange proposes to amend these two rule provisions to: (a) Limit the 
applicability of the 10-up size guarantee to public customer orders 
represented by FBs; and (b) provide that MMs must provide a one-up 
market to BD orders represented by FBs. This proposed change only 
affects Hybrid classes and, as such, has no applicability to non-Hybrid 
classes.
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    \8\ CBOE Rule 8.7(d) only applies to Hybrid classes.
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    CBOE represents that the proposed changes do not affect the 
operation of CBOE's Quote Rule (CBOE Rule 8.51), which allows the 
responsible BD to provide separate quote sizes to public customers and 
broker-dealers.\9\ FBs representing a public customer order in a Hybrid 
class will be able to request a quote on behalf of such public customer 
from MMs in the crowd and will be guaranteed to receive a firm quote 
for at least ten contracts. At the same time, a FB representing a BD 
order in a Hybrid class will be able to request a quote on behalf of a 
BD and will be guaranteed to receive a firm quote for at least one 
contract. Accordingly, allowing MMs to provide 1-up open outcry markets 
to BD orders is consistent with their obligations under the CBOE Quote 
Rule because the BD firm quote requirement, which is one contract, is 
satisfied.
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    \9\ The BD firm quote requirement on CBOE is one contract. See 
CBOE Rule 8.51.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \10\ in general, and furthers the 
objectives of section 6(b)(5) of the Act \11\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts and practices, and, in 
general, to protect investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 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

    CBOE neither solicited nor received written comments with respect 
to the proposed rule change.

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

    Because the foregoing proposed rule change (1) does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms, does not become operative until 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, and the Exchange provided the Commission with written notice 
of its intent to file

[[Page 52256]]

the proposed rule change at least five business days prior to the date 
of filing of the proposed rule change,\12\ it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \12\ On July 3, 2003, CBOE provided the Commission with written 
notice of its intent to file the proposed rule change. See letter 
from Steve Youhn, Legal Division, CBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated July 2, 2003.
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    CBOE has requested that the Commission waive the usual 30-day pre-
operative waiting period. The Commission notes that this proposal is 
substantially similar to existing Pacific Exchange, Inc. (``PCX'') Rule 
6.37(b)(5) and Interpretation .05 to PCX Rule 6.37 approved by the 
Commission.\15\ As a result, the Commission believes that it is 
consistent with the protection of investors and the public interest to 
accelerate the operative date because the proposal raises no new 
regulatory issues. Therefore, the Commission designates that the 
proposal become operative immediately.\16\
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    \15\ See Securities Exchange Act Release No. 47211 (January 17, 
2003), 68 FR 3924 (January 27, 2003) (approving File No. SR-PCX-
2002-55).
    \16\ For purposes only of accelerating the operative date of 
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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    At any time within 60 days of the filing of this 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2003-28 and 
should be submitted by September 23, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-22230 Filed 8-29-03; 8:45 am]
BILLING CODE 8010-01-P