[Federal Register Volume 68, Number 179 (Tuesday, September 16, 2003)]
[Notices]
[Pages 54251-54252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23547]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48471; File No. SR-CBOE-2003-08]


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

September 10, 2003.
    On February 27, 2003, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or ``Exchange 
Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 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). On 
July 25, 2003,

[[Page 54252]]

the Exchange submitted Amendment No. 1 to the proposed rule change.\3\
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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'').
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    The proposed rule change, as amended, was published for comment in 
the Federal Register on August 4, 2003.\4\ The Commission received no 
comments on the proposed rule change. This Order approves the proposed 
rule change, as amended.
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    \4\ See Securities Exchange Act Release No. 48237 (July 28, 
2003), 68 FR 45869.
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    The Commission has reviewed carefully the CBOE's proposed rule 
change and finds that the proposal is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\5\ and with the requirements of section 
6(b).\6\ In particular, the Commission finds that the proposal is 
consistent with section 6(b)(5) of the Act,\7\ which requires, among 
other things, that the Exchange's rules 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.
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    \5\ In approving this rule proposal, the Commission notes that 
it has also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    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 
Plan for the Purpose of Creating and Operating an Intermarket Options 
Linkage (``Linkage Plan'') \8\ and/or when the size associated with the 
quote has been depleted by automatic executions (of both Linkage orders 
and non-Linkage orders). The Exchange has represented that in certain 
circumstances it might be necessary for the autofade functionality to 
move one side of the quote beyond the bid/ask parameters provided for 
in CBOE Rule 8.7(b)(iv), and therefore, has proposed a temporary 
exception to this Rule. Under the proposed rule change, until January 
30, 2004, if the autofade functionality widens a quote beyond that 
permitted by CBOE Rule 8.7(b)(iv) for 30 seconds, a responsible broker 
or dealer disseminating that quote will not be considered in violation 
of the rule. However, if a quote remains outside of the maximum width 
after the 30 second time period, the responsible broker or dealer 
disseminating that quote will be deemed in violation of CBOE Rule 
8.7(b)(iv) for regulatory purposes.
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    \8\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000).
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    The Commission believes that because the CBOE's autofade 
functionality will automate the process, it will help ensure that 
members comply with the Linkage Plan. 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 process to 
ensure that members are in full compliance with this provision of the 
Linkage Plan.
    Further, the proposed rule change will allow the Exchange to modify 
how quotes are handled following automatic executions. Currently, if 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 Retail Automatic Execution System (``RAES'') 
is disengaged. 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).
    The Commission believes that implementation of the autofade 
functionality will facilitate compliance with the Linkage Plan and will 
result in more efficient executions through RAES, as described above. 
Therefore, the Commission believes that it is appropriate, on a pilot 
basis, to suspend the requirements of CBOE Rule 8.7(b)(iv) to allow the 
autofade functionality to widen one side of a quote beyond that 
permitted by the Rule for 30 seconds.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2003-08), as amended, is 
approved on a pilot basis, to expire January 30, 2004.

    \9\ 15 U.S.C. 78s(b)(2).
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    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23547 Filed 9-15-03; 8:45 am]
BILLING CODE 8010-01-P