[Federal Register Volume 68, Number 231 (Tuesday, December 2, 2003)]
[Notices]
[Pages 67498-67499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29939]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48827; File No. SR-CBOE-2001-04]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 4 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., To Adopt a New Rule Regarding Nullification and 
Adjustment of Transactions

November 24, 2003.

I. Introduction

    On February 14, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt an obvious error trading 
rule, CBOE Rule 6.25. On August 15, 2003, the Exchange submitted 
Amendment No. 1 to the proposed rule change.\3\ On September 12, 2003, 
the Exchange submitted Amendment No. 2 to the proposed rule change.\4\ 
On September 26, 2003, the Exchange submitted Amendment No. 3 to the 
proposed rule change.\5\ On September 29, 2003, the proposed rule 
change, as amended, was granted partial accelerated approval on a pilot 
basis and published for comment in the Federal Register on October 6, 
2003.\6\ The Commission did not receive any comments on the proposed 
rule change. On November 17, 2003, the CBOE filed Amendment No. 4 to 
the proposed rule change.\7\ This order approves the proposed rule 
change, as amended; grants accelerated approval to Amendment No. 4; and 
solicits comments from interested persons on Amendment No. 4.
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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 subparagraph (a)(5) of CBOE Rule 6.25, relating to 
erroneous quotes in the underlying market, with language 
substantially similar to 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 
accelerated effectiveness of paragraphs (a)(3), (b), (c), (d), and 
(e) of proposed CBOE Rule 6.25. The CBOE also requested that 
paragraphs (a)(3), (b), (c), (d), and (e) of proposed CBOE Rule 6.25 
operate as a pilot program until December 1, 2003.
    \6\ See Securities Exchange Act Release No. 48556 (September 29, 
2003), 68 FR 57716 (``Notice and Partial Approval Order''). In the 
Notice and Partial Approval Order, the Commission granted 
accelerated approval to paragraphs (a)(3), (b), (c), (d), and (e) of 
proposed CBOE Rule 6.25 on a pilot basis.
    \7\ See Letter from Steve Youhn, Senior Attorney, CBOE, to Nancy 
Sanow, Assistant Director, Division, Commission, dated November 14, 
2003 (``Amendment No. 4''). In Amendment No. 4, the Exchange: (1) 
Amended paragraphs (a)(1)(i) and (c) of proposed CBOE Rule 6.25 to 
include a reference to the Hybrid Opening System (``HOSS''); (2) 
defined the term ``average trade'' in proposed CBOE Rule 6.25(a)(4) 
based on the definition currently used in CBOE Rule 43.5; (3) 
requested permanent approval of paragraphs (a)(3), (b), (c), (d), 
and (e) of CBOE Rule 6.25; (4) deleted CBOE Rule 6.8(d)(iii); (5) 
amended CBOE Rule 6.20, Interpretation .05 to clarify that trades 
subject to adjustment or nullification pursuant to CBOE Rule 6.25 
shall be subject to the procedures set forth in CBOE Rule 6.25; and 
(6) made technical corrections to the proposed rule text.
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II. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change and 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\8\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) \9\ of 
the Act, which requires that the rules of an exchange be 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.\10\
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    \8\ For a description of the proposed rule change, see Notice 
and Partial Approval Order, supra, n. 6.
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
price of the executed trade indicates 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

[[Page 67499]]

proposed obvious error rule establishes specific and objective criteria 
for determining when a trade is an ``obvious error.'' The Commission 
also believes that the proposal establishes specific and objective 
procedures governing the adjustment or nullification of such trade. In 
addition, the Commission notes that several provisions of the CBOE 
obvious error rule proposal are substantially similar to proposed rule 
changes submitted by the Pacific Exchange, Inc. to adopt an obvious 
error rule and by the Exchange to adopt a trade nullification rule for 
CBOEdirect, both of which the Commission has approved.\11\ Finally, the 
Commission notes that CBOE represented that, with the adoption of CBOE 
Rule 6.25, the Exchange withdraws the effectiveness of CBOE Regulatory 
Circular RG 00-169.\12\
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    \11\ See Securities Exchange Act Release Nos. 48538 (September 
23, 2003), 68 FR 56858 (October 2, 2003) (File No. SR-PCX-2002-01); 
and 47628 (April 3, 2003), 68 FR 17697 (April 10, 2003) (File No. 
SR-CBOE-00-55).
    \12\ See Amendment No. 1, supra note 3; see also Notice and 
Partial Approval Order, supra note 6.
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\13\ for approving Amendment No. 4 to the proposed rule change 
prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register. Amendment No. 4 strengthens the 
proposal by clarifying the circumstances under which the CBOE obvious 
error rule will apply; by describing the meaning of certain provisions 
contained in CBOE Rule 6.25; and by withdrawing a provision of another 
CBOE rule that is superceded by CBOE Rule 6.25. Therefore, the 
Commission believes that granting accelerated approval of Amendment No. 
4 is appropriate and consistent with Section 6(b)(5) \14\ of the Act.
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 15 U.S.C. 78f(b)(5).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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 proposal that are filed with the Commission, and all 
written communications relating to the proposal 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 December 23, 
2003.

IV. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal, as amended, is consistent with the Act and the rules and 
regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-2001-04), as amended, 
be, and hereby is, approved, and that Amendment No. 4 to the proposed 
rule change be, and hereby is, approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29939 Filed 12-1-03; 8:45 am]
BILLING CODE 8010-01-P