[Federal Register Volume 68, Number 193 (Monday, October 6, 2003)]
[Notices]
[Pages 57716-57720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25263]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48556, File No. SR-CBOE-2001-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the Chicago Board 
Options Exchange, Inc., and Order Granting Partial Accelerated Approval 
on a Pilot Basis of the Proposed Rule Change, as Amended, To Adopt a 
New Rule Regarding Nullification and Adjustment of Transactions

September 29, 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 February 14, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') 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. On August 15, 2003, the CBOE submitted Amendment No. 1 to the 
proposed rule change.\3\ On September 12, 2003, the CBOE submitted 
Amendment No. 2 to the proposed rule change.\4\ On September 26, 2003, 
the CBOE submitted Amendment No. 3 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons. The 
Commission also grants accelerated approval of paragraphs (a)(3), (b), 
(c), (d), and (e) of proposed CBOE Rule 6.25, on a pilot basis until 
December 1, 2003.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Steve Youhn, Senior Attorney, CBOE, to Nancy 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated August 14, 2003 (``Amendment No. 
1''). Amendment No. 1 replaced the original proposed rule change in 
its entirety.
    \4\ See Letter from Steve Youhn, Senior Attorney, CBOE, to Nancy 
Sanow, Assistant Director, Division, Commission, dated September 11, 
2003 (``Amendment No. 2''). In Amendment No. 2, the CBOE replaced 
proposed paragraph 6.25(a)(5), relating to erroneous quotes in the 
underlying security, with language substantially identical to that 
contained in CBOE Rule 43.5(b)(4).
    \5\ See Letter from Steve Youhn, Senior Attorney, CBOE, to Nancy 
Sanow, Assistant Director, Division, Commission, dated September 26, 
2003 (``Amendment No. 3''). In Amendment No. 3, the CBOE requested 
that the Commission accelerate effectiveness of proposed CBOE Rule 
6.25(a)(3) and proposed CBOE Rule 6.25(b), (c), (d), and (e). The 
CBOE also requested that these provisions operate as a pilot until 
December 1, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt an obvious error trading rule. 
Proposed new language is italicized; Federal Register proposed 
deletions are in [brackets].
* * * * *

Rule 6.25 Nullification and Adjustment of Electronic Transactions

    This Rule governs the nullification and adjustment of options 
trades executed electronically and has no application to options trades 
executed in open outcry.

(a) Trades Subject to Review

    A member or person associated with a member may have a trade 
adjusted or nullified if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error: An obvious pricing error will be deemed to 
have occurred when the execution price of a transaction is above or 
below the fair market value of the option by at least a prescribed 
amount. For series trading with normal bid-ask differentials as 
established in Rule 8.7(b)(iv), the prescribed amount shall be: (a) the 
greater of $0.10 or 10% for options trading under $2.50; (b) 10% for 
options trading at or above $2.50 and under $5; or (c) $0.50 for 
options trading at $5 or higher. For series trading with bid-ask 
differentials that are greater than the widths established in Rule 
8.7(b)(iv), the prescribed error amount shall be: (a) the greater of 
$0.20 or 20% for options trading under $2.50; (b) 20% for options 
trading at or above $2.50 and under $5; or (c) $1.00 for options 
trading at $5 or higher.
    (i) Definition of Fair Market Value: For purposes of this rule 
only, the fair market value of an option is the midpoint of the 
national best bid and national best offer for the series (across all 
exchanges trading the option). In multiply listed issues, if there are 
no quotes for comparison purposes, fair market value shall be 
determined by Trading Officials. For singly-listed issues, fair market 
value shall be the first quote after the transaction(s) in question 
that does not reflect the erroneous transaction(s). For transactions 
occurring as part of the Rapid Opening System (``ROS trades''),

[[Page 57717]]

fair market value shall be the first quote after the transaction(s) in 
question that does not reflect the erroneous transaction(s).
    (2) Obvious Quantity Error: An obvious error in the quantity term 
will be deemed to occur when the transaction size exceeds the 
responsible broker or dealer's average disseminated size over the 
previous four hours by a factor of five (5) times. The quantity to 
which a transaction shall be adjusted from an obvious quantity error 
shall be the responsible broker or dealer's average disseminated size 
over the previous four trading hours (which may include the previous 
trading day).
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems: 
Trades arising out of a ``verifiable disruption or malfunction'' in the 
use or operation of any Exchange automated quotation, dissemination, 
execution, or communication system may either be nullified or adjusted 
by Trading Officials.
    (4) Erroneous Print in Underlying: A trade resulting from an 
erroneous print disseminated by the underlying market which is later 
cancelled or corrected by that underlying market may be adjusted or 
nullified. In order to be adjusted or nullified, however, the trade 
must be the result of an erroneous print that is higher or lower than 
the average trade in the underlying security during a two-minute period 
before and after the erroneous print by an amount at least five times 
greater than the average quote width for such underlying security 
during the same period.
    (5) Erroneous Quote in Underlying: A trade resulting from an 
erroneous quote in the underlying security may be adjusted or 
nullified. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and has a width at least five times greater 
than the average quote width for such underlying security on the 
primary market during the time period encompassing two minutes before 
and after the dissemination of such quote. For purposes of this Rule, 
the average quote width shall be determined by adding the quote widths 
of each separate quote during the four minute time period referenced 
above (excluding the quote in question) and dividing by the number of 
quotes during such time period (excluding the quote in question).
    (6) Trades Below Intrinsic Value: An obvious pricing error will be 
deemed to occur when the transaction price of an equity option is more 
than $0.10 below the intrinsic value of the same option (an option that 
trades at its intrinsic value is sometimes said to trade at parity). 
Provided, however, that this paragraph (6) shall not apply to 
transactions occurring during the last two minutes of the trading day 
(which is typically 3:00:01 p.m. (CT) to 3:02 p.m. (CT)) on days with 
regular trading hours).
    (i) Definition of Intrinsic Value: For purposes of this rule, the 
intrinsic value of an equity call option equals the value of the 
underlying stock (measured from the bid or offer as described below) 
minus the strike price, and the intrinsic value of an equity put option 
equals the strike price minus the value of the underlying stock 
(measured from the bid or offer as described below), provided that in 
no case is the intrinsic value of an option less than zero. In the case 
of purchasing call options and selling put options, intrinsic value is 
measured by reference to the bid in the underlying security, and in the 
case of purchasing put options and selling call options, intrinsic 
value is measured by reference to the offer in the underlying security.

(b) Procedures for Reviewing Transactions

    (1) Notification: Any member or person associated with a member 
that believes it participated in a transaction that may be adjusted or 
nullified in accordance with paragraph (a) must notify any Trading 
Official promptly but not later than fifteen (15) minutes after the 
execution in question. For transactions occurring after 2:45 p.m. 
(CST), notification must be provided promptly but not later than 
fifteen (15) minutes after the close of trading of that security on 
CBOE. Absent unusual circumstances, Trading Officials shall not grant 
relief under this Rule unless notification is made within the 
prescribed time periods. In the absence of unusual circumstances, 
Trading Officials (either on their own motion or upon request of a 
member) must initiate action pursuant to paragraph (a)(3) above within 
sixty (60) minutes of the occurrence of the verifiable disruption or 
malfunction. When Trading Officials take action pursuant to paragraph 
(a)(3), the members involved in the transaction(s) shall receive verbal 
notification as soon as is practicable.
    (2) Review and Determination: Once a party to a transaction has 
applied to a Trading Official for review, the transaction shall be 
reviewed and a determination rendered, unless both parties to the 
transaction agree to withdraw the application for review prior to the 
time a decision is rendered.
    Absent unusual circumstances (e.g., a large number of disputed 
transactions arising out of the same incident), Trading Officials must 
render a determination within sixty (60) minutes of receiving 
notification pursuant to paragraph (b)(1) above. If the transaction(s) 
in question occurred after 2:30 p.m., Trading Officials shall have 
until 9:30 a.m. the following morning to render a determination. 
Trading Officials shall promptly provide verbal notification of a 
determination to the members involved in the disputed transaction and 
to the control room.

(c) Adjustments

    Unless otherwise specified in Rule 6.25(a)(1)-(6), transactions 
will be adjusted provided the adjusted price does not violate the 
customer's limit price. Otherwise, the transaction will be nullified. 
With respect to 6.25(a)(1)-(5), the price to which a transaction shall 
be adjusted shall be the National Best Bid (Offer) immediately 
following the erroneous transaction with respect to a sell (buy) order 
entered on the Exchange. For ROS transactions, the price to which a 
transaction shall be adjusted shall be based on the first non-erroneous 
quote after the erroneous transaction on CBOE. With respect to 
6.25(a)(6), the transaction shall be adjusted to a price that is $0.10 
under parity.

(d) Review by the Appeals Committee

    A member affected by a determination made under this rule may 
appeal such determination to the Appeals Committee, in accordance with 
Chapter XIX of the Exchange's rules. For purposes of this Rule, a 
member must be aggrieved as described in Rule 19.1. Notwithstanding any 
provision in Rule 19.2 to the contrary, a request for review must be 
made in writing (in a form and manner prescribed by the Exchange) no 
later than the close of trading on the next trade date after the member 
receives verbal notification of such determination by Trading 
Officials.

(e) Negotiated Trade Nullification

    A trade may be nullified if the parties to the trade agree to the 
nullification. When all parties to a trade have agreed to a trade 
nullification one party must promptly disseminate cancellation 
information in OPRA format.

Interpretations and Policies * * *

    .01 Applicability: Trading Officials may also allow for the 
execution of ROS trades (and assign those trades to participating ROS 
market-makers) that were not executed on the opening but that should 
have been executed had ROS opened the series at the non-erroneous 
quote. The Exchange will endeavor to notify its members as soon as 
practicable after the correction of an erroneous print and will 
indicate that

[[Page 57718]]

this may result in the adjustment of trades executed pursuant to ROS. 
The only trades that will be adjusted are those that were executed on 
the opening or those that should have executed on the opening. All 
adjustments will be made during the day when the correction of the 
erroneous print occurred.
    .02 Trading Officials: The term ``Trading Officials'' means two 
Exchange members designated as Floor Officials and one member of the 
Exchange's trading floor liaison (TFL) staff.
* * * * *
Rule 6.2A Rapid Opening System
    (a)(i)-(ii) No change
    (iii) [In cases where ROS opens a particular class based on an 
erroneous opening print disseminated by the underlying market, which is 
later corrected by that underlying market, two Floor Officials may 
adjust the trades to reflect the accurate market. Floor Officials may 
also allow for the execution of trades (and assign those trades to 
participating ROS market-makers) that were not executed on the opening 
but that should have been executed had ROS opened the series at the 
accurate price. The Exchange will endeavor to notify its members as 
soon as practicable after the correction of an erroneous print and will 
indicate that this may result in the adjustment of trades executed 
pursuant to ROS. The only trades that will be adjusted are those that 
were executed on the opening or those that should have executed on the 
opening. All adjustments will be made during the day when the 
correction of the erroneous print occurred.]
    (b)-(d) No change
* * * * *

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 aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to adopt new CBOE Rule 6.25 to allow it to 
either adjust or nullify a transaction the terms of which are obviously 
in error. The proposed rule contains objective standards for 
determining when an electronic transaction constitutes an obvious 
error, under what circumstances a trade may be adjusted or nullified, 
the price to which such transaction would be adjusted, and the 
procedures for appealing an adverse decision.
    a. Trades Subject to Review: Proposed CBOE Rule 6.25(a). Proposed 
CBOE Rule 6.25(a) specifies the transactions that may be adjusted or 
nullified. The price to which transactions are adjusted shall be as 
specified in proposed CBOE Rule 6.25(c).
    i. Obvious Price Error. Trading Officials \6\ may nullify or adjust 
transactions in which there is an obvious pricing error, which will be 
deemed to have occurred when the execution price of a transaction is 
higher or lower than the fair market value of the series by the 
following amount: (a) The greater of $0.10 or 10% for options trading 
under $2.50; (b) 10% for options trading at or above $2.50 and under 
$5; or (c) $0.50 for options trading at $5 or higher. For series 
trading with bid-ask differentials that are greater than the widths 
established in Rule 8.7(b)(iv), the prescribed error amount shall be 
double the requirements listed above.\7\
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    \6\ The term ``Trading Officials'' means two Exchange members 
designated as Floor Officials and one member of the Exchange's 
trading floor liaison (TFL) staff.
    \7\ The amounts would be: (a) the greater of $0.20 or 20% for 
options trading under $2.50; (b) 20% for options trading at or above 
$2.50 and under $5; or (c) $1.00 for options trading at $5 or 
higher.
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    For purposes of the proposed Rule only, the fair market value of an 
option is the midpoint of the national best bid and national best offer 
for the series (across all exchanges trading the option). In multiply-
listed issues, if there are no quotes for comparison purposes, fair 
market value shall be determined by Trading Officials. For singly-
listed issues and transactions occurring as part of the Rapid or Hybrid 
Opening System \8\ (``ROS or HOSS trades''), fair market value shall be 
the first quote after the transaction(s) in question that do not 
reflect the erroneous transaction(s).
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    \8\ The CBOE inadvertently omitted mention of HOSS from the rule 
text of proposed CBOE Rule 6.25(a)(1)(i). The CBOE has committed to 
submitting an amendment reflecting the changes relating to HOSS 
discussed herein, prior to permanent approval of the proposed rule 
change, as amended. Telephone conversation between Steve Youhn, 
Senior Attorney, CBOE and Susie Cho, Special Counsel, Division, 
Commission on September 26, 2003.
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    ii. Obvious Quantity Error. An obvious error in the quantity term 
will be deemed to occur when the transaction size exceeds the 
responsible broker or dealer's average disseminated size over the 
previous four hours by a factor of five (5) times. The transaction size 
will be adjusted to the responsible broker or dealer's average 
disseminated size over the previous four hours (which may include a 
portion of the previous business day). For example, if the DPM for 
class XYZ has been disseminating a size of 100 in a particular class 
for the preceding four hours and then inadvertently disseminates a size 
of 1,000 contracts, which is subsequently executed against, the 
quantity term of that transaction may be adjusted to 100 contracts.
    iii. Verifiable Disruptions or Malfunctions of Exchange Systems. 
Trading officials may nullify or adjust transactions resulting from a 
verifiable disruption or malfunction in the use or operation of any 
automated Exchange quotation, dissemination, execution, or 
communication system.
    iv. Erroneous Print in Underlying. Trading Officials may adjust or 
nullify a trade resulting from an erroneous print disseminated by the 
underlying market that is later cancelled or corrected by that 
underlying market. In order to be adjusted or nullified, however, the 
trade must be the result of an erroneous print that is higher or lower 
than the average trade in the underlying security during a two-minute 
period before and after the erroneous print by an amount at least five 
times greater than the average quote width for such underlying security 
during the same period.
    v. Erroneous Quote in Underlying. Trading Officials may adjust or 
nullify a trade resulting from an erroneous quote in the underlying 
security. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and has a width at least five times greater 
than the average quote width for such underlying security on the 
primary market during the time period encompassing two minutes before 
and after the dissemination of such quote. For purposes of the proposed 
Rule, the average quote width shall be determined by adding the quote 
widths of each separate quote during the four minute time period 
referenced above (excluding the quote in question)

[[Page 57719]]

and dividing by the number of quotes during such time period (excluding 
the quote in question).\9\
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    \9\ Telephone conversation between Steve Youhn, Senior Attorney, 
CBOE and Susie Cho, Special Counsel, Division, Commission on 
September 16, 2003.
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    vi. Trades Below Intrinsic Value. An obvious pricing error will be 
deemed to occur when the transaction price of an equity option is more 
than $0.10 below the intrinsic value of the same option (an option that 
trades at its intrinsic value is sometimes said to trade at 
``parity'').\10\ Proposed CBOE Rule 6.25(a)(6) shall not apply to 
transactions occurring during the last two minutes of the trading day 
(which is typically 3:00:01 p.m. (CT) to 3:02 p.m. (CT) on days with 
regular trading hours).
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    \10\ For purposes of the proposed rule, the intrinsic value of 
an equity call option equals the value of the underlying stock 
(measured from the bid or offer as described below) minus the strike 
price, and the intrinsic value of an equity put option equals the 
strike price minus the value of the underlying stock (measured from 
the bid or offer as described below), provided that in no case is 
the intrinsic value of an option less than zero. In the case of 
purchasing call options and selling put options, intrinsic value is 
measured by reference to the bid in the underlying security, and in 
the case of purchasing put options and selling call options, 
intrinsic value is measured by reference to the offer in the 
underlying security.
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    b. Review Procedures: Proposed CBOE Rule 6.25(b). Proposed CBOE 
Rule 6.25(b) delineates objective standards regarding the review of 
transactions believed to have been executed in error. Pursuant to this 
rule, a member that believes it participated in a transaction that may 
be adjusted or nullified must notify any Trading Official promptly but 
not later than fifteen (15) minutes after the execution in question. 
For transactions occurring after 2:45 p.m. (CST), notification must be 
provided promptly but not later than fifteen (15) minutes after the 
close of trading of that security on CBOE on the same trading day. 
Absent unusual circumstances, Trading Officials shall not grant relief 
under the proposed Rule unless notification is made within the 
prescribed time periods.\11\
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    \11\ In the absence of unusual circumstances, Trading Officials 
(either on their own motion or upon request of a member) must 
initiate action pursuant to paragraph (a)(3) above within sixty (60) 
minutes of the occurrence of the verifiable disruption or 
malfunction. When Trading Officials take action pursuant to 
paragraph (a)(3), the members involved in the transaction(s) shall 
receive verbal notification as soon as is practicable.
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    Once a party to a transaction has applied to a Trading Official for 
review, the transaction shall be reviewed and a determination rendered, 
unless both parties to the transaction agree to withdraw the 
application for review prior to the time a decision is rendered. Absent 
unusual circumstances (e.g., a large number of disputed transactions 
arising out of the same incident), Trading Officials must render a 
determination within sixty (60) minutes of receiving notification.\12\ 
Trading Officials shall promptly provide verbal notification of a 
determination to the members involved in the disputed transaction and 
to the control room.
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    \12\ If the transaction(s) in question occurred after 2:30 p.m., 
Trading Officials shall have until 9:30 a.m. the following morning 
to render a determination.
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    c. Price Adjustments: Proposed CBOE Rule 6.25(c). Unless otherwise 
specified in proposed CBOE Rule 6.25(a)(1)-(6), transactions will be 
adjusted provided the adjusted price does not violate the customer's 
limit price. Otherwise, the transaction will be nullified. With respect 
to proposed CBOE Rule 6.25(a)(1)-(5), the price to which a transaction 
shall be adjusted shall be the National Best Bid (Offer) immediately 
following the erroneous transaction with respect to a sell (buy) order 
entered on the Exchange. For ROS transactions, the price to which a 
transaction shall be adjusted shall be based on the first non-erroneous 
quote after the erroneous transaction on CBOE. With respect to proposed 
CBOE Rule 6.25(a)(6), the transaction shall be adjusted to a price that 
is $0.10 under parity.
    d. Appeal of Floor Officials' Decision: Proposed CBOE Rule 6.25(d). 
Proposed CBOE Rule 6.25(d) provides objective standards regarding the 
appeal of an adverse decision. A member affected by a determination 
made under this rule may appeal to the Appeals Committee, in accordance 
with Chapter XIX of the Exchange's rules.\13\ Notwithstanding any 
provision in CBOE Rule 19.2 to the contrary, a request for review must 
be made in writing (in a form and manner prescribed by the Exchange) no 
later than the close of trading on the next trade date after the member 
receives verbal notification of such determination by Trading 
Officials.
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    \13\ For purposes of this Rule, a member must be aggrieved as 
described in CBOE Rule 19.1.
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    e. Negotiated Trade Nullification: Proposed CBOE Rule 6.25(e). 
Proposed CBOE Rule 6.25(e)clarifies that a trade may be nullified if 
the parties to the trade agree to the nullification. When all parties 
to a trade have agreed to a trade nullification one party must promptly 
disseminate cancellation information in OPRA format.
    f. Applicability. The Exchange represents that proposed CBOE Rule 
6.25 will operate floorwide in both equity and index option products. 
The Exchange proposes to amend CBOE Rule 6.2A, Rapid Opening System, to 
indicate that ROS transactions that are executed at clearly erroneous 
prices will now be adjusted in accordance with proposed CBOE Rule 6.25. 
New Interpretation .01 to proposed CBOE Rule 6.25 consists of language 
previously contained in CBOE Rule 6.2A(a)(iii). Accordingly, the CBOE 
believes that the relocation of this rule language from CBOE Rule 6.2A 
to proposed CBOE Rule 6.25 raises no new or novel issues.
    With the adoption of proposed CBOE Rule 6.25, the Exchange will 
withdraw the effectiveness of Regulatory Circular RG00-169.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \14\ in general, and furthers the 
objectives of Section 6(b)(5)\15\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The CBOE believes that the proposed rule change, as amended, will 
provide objective standards to use in correcting executions made as a 
result of an obvious error and procedures by which Trading Officials' 
decisions may be appealed.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
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

    The Exchange did not solicit or receive written comments on 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 Exchange consents, the Commission will:

[[Page 57720]]

    (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 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-2001-04 and should be submitted by October 27, 2003.

V. Commission's Findings and Order Granting Accelerated Approval of 
Amendment No. 3 on a Pilot Basis

    After careful review, the Commission finds that proposed paragraphs 
(a)(3), (b), (c), (d), and (e) of proposed CBOE Rule 6.25 are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that these proposed 
rules are consistent with the requirements of Section 6(b)(5) \17\ of 
the Act, which requires, among other things, that the rules of an 
exchange be designed to promote just and equitable principals 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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    \16\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions where 
there has been a documented Exchange system disruption or malfunction, 
the execution of a trade under such circumstances indicates that an 
``obvious error'' may exist, suggesting that it is unrealistic to 
expect that the parties to the trade had come to a meeting of the minds 
regarding the terms of the transaction. In the Commission's view, the 
determination of whether such an ``obvious error'' has occurred should 
be based on specific and objective criteria and subject to specific and 
objective procedures. The Commission believes that the CBOE's proposed 
rule relating to an obvious error resulting from a verifiable Exchange 
system disruptions and malfunctions establishes such specific and 
objective criteria for determining when a trade may involve an 
``obvious error'' and thus may be adjusted or nullified. The CBOE has 
specified that trading officials may adjust or bust transactions 
resulting from a verifiable disruption or malfunction in the use or 
operation of any automated Exchange quotation, dissemination, 
execution, or communication system. The Commission also believes that 
the proposal establishes specific and objective procedures governing 
the adjustment or nullification of such trades.
    The Commission finds good cause, pursuant to Section 6(b)(5) \18\ 
and Section 19(b) \19\ of the Act, to accelerate approval of paragraphs 
(a)(3), (b), (c), (d), and (e) of the proposed CBOE Rule 6.25 on a 
pilot basis, prior to the thirtieth day after the date of publication 
of notice thereof in the Federal Register. The Commission notes that 
the provisions of the proposal regarding verifiable disruptions or 
malfunctions of Exchange systems; procedures for reviewing 
transactions; adjustments of obvious error trades; review by the 
appeals committee; and negotiated trade nullification, are 
substantially similar to proposed rule changes submitted by the 
International Securities Exchange, Inc. and Pacific Exchange, Inc., as 
well as the rules for CBOEdirect, all of which the Commission has 
approved.\20\ Furthermore, pursuant to Amendment No. 3 to the proposed 
rule change, these provisions of the proposed rule change are in effect 
on a pilot basis until December 3, 2003. The Commission finds, 
therefore, that granting partial accelerated approval of the proposed 
rule change, as amended, prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register, is appropriate 
and consistent with Section 6(b)(5) \21\ of the Act.
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    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78s(b).
    \20\ See Securities Exchange Act Release No. 48538 (September 
25, 2003) (SR-PCX-2002-01); Securities Exchange Act Release No. 
48097 (June 26, 2003), 68 FR 39604 (July 2, 2003) (SR-ISE-2003-10); 
and Securities Exchange Act Release No. 47628 (April 3, 2003), 68 FR 
17697 (April 10, 2003) (SR-CBOE-00-55).
    \21\ 15 U.S.C. 78f(b)(5).
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VI. Conclusion

    For the reasons discussed above, the Commission finds that 
paragraphs (a)(3), (b), (c), (d), and (e) of CBOE Rule 6.25, as set 
forth in the proposed rule change, as amended, are consistent with the 
Act and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that paragraphs (a)(3), (b), (c), (d), and (e) of CBOE Rule 
6.25, as set forth in the proposed rule change, as amended, be and 
hereby are approved on an accelerated basis, on a pilot basis until 
December 1, 2003.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-25263 Filed 10-3-03; 8:45 am]
BILLING CODE 8010-01-P