[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Notices]
[Pages 75004-75007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48953; File No. SR-CBOE-2003-57]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Trading of Index Options and Options on 
ETFs on the CBOE Hybrid System

December 18, 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 December 8, 2003, the Chicago Board Options Exchange, Inc. 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the CBOE. The Exchange has filed the proposal as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A)(iii) of the 
Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission.\5\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The Exchange asked the Commission to waive the 30-day 
operative delay. See Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-
4(f)(6)(iii).
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1. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to provide for the trading of index options and 
options on exchange traded funds (``ETFs'') on the CBOE Hybrid System 
(``Hybrid System''). The text of the proposed rule change appears 
below. Proposed new language is in italics; proposed deletions are in 
[brackets].

Rule 6.45A Priority and Allocation of Trades for CBOE Hybrid System

    (a)-(d) No change.
    (e) [Effective Date of Rule] Classes Trading on Hybrid.
    [The Exchange will commence rollout of the Hybrid System by May 30, 
2003.] By December 31, 2003, Hybrid will be operational in CBOE's 200 
most active equity option classes and, by December 31, 2004, Hybrid 
will be operational in CBOE's 500 most active equity option classes. 
The Exchange intends to implement Hybrid floorwide in all other equity 
classes by the fourth quarter of 2006. Index option classes and options 
on ETFs specifically designated by the appropriate Floor Procedure 
Committee may trade on the Hybrid System. In order to be eligible for 
trading on Hybrid, index option classes and options on ETFs must 
utilize an in-crowd Designated Primary Market Maker.
* * * * *

Rule 24.13 Trading Rotations

    The opening rotation for index options shall be held at or as soon 
as practicable after 8:30 a.m. Chicago time. Except as the appropriate 
Floor Procedures Committee may direct, opening rotations shall be 
conducted in the order and manner the Order Book

[[Page 75005]]

Official determines to be appropriate under the circumstances. The 
appropriate Floor Procedure Committee may provide for the opening 
rotation to be conducted by use of the Exchange's Rapid Opening System 
as set forth in Rule 6.2A or the Exchange's Hybrid Opening System as 
set forth in Rule 6.2B. The Order Book Official, with the approval of 
two Floor Officials, may deviate from any rotation policy or procedure 
issued by the appropriate Floor Procedures Committee when they conclude 
in their judgment that such action is appropriate in the interests of a 
fair and orderly market.

Interpretations and Policies

    .01 No Change.
    .02 Modified Opening Rotation--In conducting the opening rotation 
in S&P 100 options, certain option series having the nearest expiration 
may be opened as described in Interpretation .01 to Rule 6.2 (``main 
rotation''). The remaining series having the nearest expiration and 
other series having more distant expirations may be divided into one or 
more zones and be opened simultaneously with the main rotation by an 
Order Book Official in the following manner. One or more Lead Market 
Makers (LMM) in each zone shall be responsible for quoting a two-sided 
market in each of the series assigned to the zone. The markets will 
generally be set without prior indication of the imbalances to be 
facilitated. Only in the case of extreme market conditions or an 
extremely large imbalance of opening orders may the Order Book Official 
indicate the direction or size of the order imbalance. Upon receiving 
the LMM market, the Order Book Official will state the net imbalance in 
each series to the LMM who shall buy or sell it.
    Instead of the procedure described in the paragraph above, the 
opening rotation in S&P 100 options may be conducted using the 
Exchange's Rapid Opening System. Index options that trade on the Hybrid 
System must utilize the Hybrid Opening System, as described in CBOE 
Rule 6.2B.
    Upon conclusion of the main rotation, the Order Book Official 
conducting the main rotation will declare open trading in all series. 
Such declaration shall apply to the main rotation and to all zones 
which have completed opening rotation. Open trading in the series 
assigned to the zones shall not commence before the Order Book Official 
conducting the main rotation has made such declaration.
    Market-Makers who wish to participate in the opening of series in 
which they do not hold LMM or SMM appointments may transmit written 
non-cancelable proprietary and Market-Maker orders to the LMM in that 
zone ten minutes prior to the opening of trading. The participation on 
the opening imbalance will not exceed the participation of a 
Supplemental Market-Maker (``SMM'') in that zone.
    .03 No Change.
* * * * *

Rule 24.15 [RAES Operations in] Automatic Execution of Index Options

    The operations of the Retail Automated Execution System (RAES) for 
index options not trading on the Hybrid System are subject to Rule 6.8. 
Rule 6.13 governs the automatic execution of index options trading on 
the Hybrid System.
* * * * *

Rule 24.19 Multi-Class Broad-Based Index Spread Orders

    (a) No change.
    (b)(i)-(iii) No change.
    (iv) The priority of bids or offers received from the primary 
trading station will be determined, with respect to each other, by the 
terms of paragraphs (a) and (b) of Rule 6.45 for non-Hybrid classes or 
by paragraphs (a)-(d) of Rule 6.45A for Hybrid classes. Bids or offers 
received promptly from the other trading crowd may participate equally 
with equal bids or offers from the primary trading station that were 
received prior to the bids or offers from the other trading station. 
The meaning of promptly will be determined according to the size of the 
order and other relevant circumstances.
* * * * *

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 mose significant parts of such 
statements.

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

    In May of 2003, the Commission approved the Hybrid System.\6\ The 
Hybrid System merges the electronic and open outcry trading models, 
offering market participants the ability to stream electronically their 
own firm disseminated market quotes representing their trading 
interest. Currently, the Exchange trades only equity options on the 
Hybrid System. The purpose of this rule filing is to provide for the 
trading of index options and options on exchange traded funds 
(``ETFs'') on the Hybrid System.
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    \6\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (``Hybrid Release'').
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Uniformity of Operation Between Equity and Index Options and Options on 
ETFs

    The Exchange proposes that the Hybrid System will function in the 
exact same manner in index classes and options on ETFs as it does in 
equity option classes, the operation of which was described in detail 
in the Hybrid Release. All of the Hybrid rules, including CBOE Rules 
6.13 and 6.45A, would apply to the indexes and options on ETFs in the 
exact same manner they apply to options on equities. As such, incoming 
electronic orders in index/ETF options would be eligible for automatic 
execution pursuant to CBOE Rule 6.13 and would be allocated via the 
Ultimate Matching Algorithm (``UMA''). Open outcry trades would be 
allocated pursuant to CBOE Rule 6.45(b) and the Quote Trigger and Quote 
Lock features of CBOE Rules 6.45A(c) and (d) would apply to index/ETF 
option trading. Index and ETF option market makers would be subject to 
the same market maker obligations as their equity brethren. The only 
rule changes necessary to accommodate Hybrid trading in index options 
are minor and non-substantive in nature, as described below.\7\
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    \7\ Equity option trading rules govern ETF trading.
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Changes to Index CBOE Rules 24.13, 24.15, and 24.19

    CBOE proposes to amend CBOE Rule 24.13.02 clarifying that the 
Hybrid Opening System (``HOSS'') will be utilized for all index classes 
trading on the Hybrid System.\8\ The proposed rule

[[Page 75006]]

change to CBOE Rule 24.15 would provide that retail automated execution 
systems (``RAES'') will continue to be operational for non-Hybrid 
classes while CBOE Rule 6.13 will govern automatic executions in Hybrid 
classes.\9\ Finally, the Exchange proposes to amend paragraph (b)(iv) 
of CBOE Rule 24.19 to delineate priority principles applicable to 
multi-class index option spreads in non-Hybrid versus Hybrid classes.
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    \8\ Currently, options on indexes and ETFs generally open in 
accordance with the opening procedures described in CBOE Rule 6.2A, 
Rapid Opening System. The HOSS rules were approved in the Hybrid 
Release.
    \9\ This is the same as for equity options on Hybrid, which are 
governed by CBOE Rule 6.13. Non-Hybrid equity option classes 
continue to be governed by CBOE Rule 6.8.
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Designation of Indexes Trading on Hybrid

    CBOE also proposes to amend CBOE Rule 6.45A(e), which governs the 
rollout schedule for equity option classes, to give the appropriate 
Floor Procedure Committee (``FPC'') the discretion to determine which 
index option classes and options on ETFs will trade on the Hybrid 
Sytem. The exchange represents that this is identical to the equity 
option rule, where the appropriate committee determines the rollout 
schedule for equity option classes.
    The current Hybrid rules only allow the trading of products in 
which there is a Designated Primary Market Maker (``DPM''). The 
Exchange does not propose any changes to these rules. As such, only 
those index or ETF option classes that have DPMs would be eligible to 
trade on the Hybrid System. An Index or ETF option class that does not 
have a DPM may not trade on the Hybrid System until such time that the 
DPM system is in place in that index or ETF option class or until the 
Exchange adopts additional rules allowing the introduction of Hybrid 
trading with other than a DPM (e.g., a Lead Market Maker or other type 
of trading structure.\10\ The Exchange proposes amending language to 
Exchange CBOE Rule 6.45A(e) to incorporate the above restriction.
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    \10\ Any such rules, of course, would be filed with the 
Commission. Options on the OEX, SPX, DJX, and DIA trade under a Lead 
Market Maker (``LMM'') System. CBOE will not commence trading these 
products on Hybrid until it either adopts LMM rules applicable to 
Hybrid trading or until they convert to a DPM system. The Exchange 
currently has no intention of converting SPX, OEX, DJX, or DIA to a 
DPM system.
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    In determining which index or ETF option classes to trade on the 
Hybrid System, the appropriate committee would consider several 
factors. First, it would look to the level of trading volume in a 
particular index/ETF option class. Generally, active index/ETF option 
classes (of those with DPMs) would be introduced to Hybrid trading 
sooner than will those index/ETF option classes with low trading 
volume. Second, the FPC would consider the readiness of the trading 
crowd. Before the Exchange lists a product on the Hybrid System, it 
would provide education to the affected market participants in several 
different areas, such as: how Hybrid operates, how market participants 
connect to the Hybrid System, etc. Trading crowds exhibiting more 
readiness to trade likely would begin trading on the Hybrid System more 
quickly than will crowds not demonstrating the same level of readiness. 
Third, the FPC would consider market share in a particular index/ETF 
option class. An index or ETF option class in which the FPC believes 
the Exchange can obtain or maintain a high market share would be a 
prime candidate for Hybrid trading.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirement under section 6(b)(5) of the Act \11\ in that it is 
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 by providing automatic executions for eligible 
electronic orders; by providing an open outcry trading environment for 
trades to occur on the floor; and offer market participants the ability 
to electronically disseminate their own firm market quotes, which 
should result in a greater number of automatic executions for orders on 
the Exchange.
    The Exchange also believes that extending Hybrid to selected index 
and ETF options, thereby adding market makers to the quoting equation, 
may have the effect of narrowing spreads and increasing depth.
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    \11\ 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 has neither solicited nor received written comments on 
the proposed rule change.

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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days (or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest) after the date of the filing, the proposed rule change has 
become effective pursuant to section 19(b)(3)(A) of the Act \12\ and 
Rule 19b-4(f)(6) thereunder. \13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange satisfied the five-day 
pre-filing requirement. The Exchange further requested that the 
Commission waive the 30-day operative delay, as specified in Rule 19b-
4(f)(6)(iii)\14\ and designated the proposed rule change to become 
operative immediately to enable index options and options on ETFs to be 
traded on the Hybrid System immediately.
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    \14\ Id.
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    The Commission believes that it is consistent with the protection 
of investors and the public interest to designate the proposal 
immediately operative.\15\ CBOE currently trades equity options on the 
Hybrid System. The Exchange represents that the Hybrid System will 
function in the exact same manner in index classes and options on ETFs 
as it does in equity classes. The Commission notes that the operation 
of the Hybrid System was previously the subject of a full comment 
period pursuant to section 19(b) of the Act.\16\ The Commission does 
not believe that proposed rule change raises any new issues of 
regulatory concern. Accordingly, the Commission believes that there is 
good cause, pursuant to section 19(b)(3)(A)(iii) of the Act,\17\ to 
designate that the proposal become operative immediately.
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    \15\ 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).
    \16\ 15 U.S.C 78s(b).
    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
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    At anytime within 60 days of the filing of the proposed rule 
change, the

[[Page 75007]]

Commission may summarily abrogate such proposed 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.\18\
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    \18\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. SR-
CBOE-2003-57. The file number should be included on the subject line if 
e-mail is used. To help the Commission process and review your comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to the File No. SR-CBOE-2003-57 and should be 
submitted by January 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31807 Filed 12-24-03; 8:45 am]
BILLING CODE 8010-01-M