[Federal Register Volume 68, Number 250 (Wednesday, December 31, 2003)]
[Notices]
[Pages 75673-75674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32176]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48990; File No. SR-CBOE-2003-25]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 by the Chicago Board Options 
Exchange, Inc. Relating to Bid-Ask Differentials

December 23, 2003.

I. Introduction

    On June 20, 2003, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``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 permit, under certain 
circumstances, a bid-ask differential of no more than $0.50 for options 
where the bid price is less than $2. The CBOE filed Amendments Nos. 1, 
2, and 3 to the proposal on July 3, 2003,\3\ September 10, 2003,\4\ and 
October 29, 2003,\5\ respectively.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Steve Youhn, CBOE, to Deborah Flynn, 
Division of Market Regulation (``Division''), Commission, dated July 
2, 2003, and accompanying Form 19b-4 (``Amendment No. 1'').
    \4\ See letter from Steve Youhn, CBOE, to Deborah Flynn, 
Division, Commission, dated September 9, 2003 (``Amendment No. 2'').
    \5\ See letter from Steve Youhn, CBOE, to Deborah Flynn, 
Division, Commission, dated October 28, 2003 (``Amendment No. 3'').
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    The proposed rule change and Amendment Nos. 1, 2, and 3 were 
published for comment in the Federal Register on November 19, 2003.\6\ 
The Commission received no comments regarding the proposal, as amended. 
This order approves the proposed rule change, as amended.
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    \6\ See Securities Exchange Act Release No. 48771 (November 12, 
2003), 68 FR 65330.
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II. Description of the Proposal

    Currently, the CBOE's rules establish a bid/ask differential of 
$0.25 for options where the bid price is less than $2.\7\ The CBOE 
proposes to amend CBOE Rule 8.7, ``Obligations of Market Makers,'' to 
allow the appropriate Market Performance Committee to establish bid-ask 
differentials that are no more than $0.50 wide (``double-width'') for 
options where the bid price is less than $2 when the primary market for 
the underlying security: (1) Reports a trade outside of its 
disseminated quote, including any Liquidity Quote; \8\ or (2) 
disseminates an inverted quote (together, the ``Triggering Events'').
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    \7\ See CBOE Rule 8.7(b)(iv).
    \8\ The rules of the NYSE permit the dissemination, in selected 
securities, of a ``Liquidity Bid'' and a ``Liquidity Offer'' which 
reflect aggregated NYSE trading interest at a specific price 
interval below the best bid (in the case of a Liquidity Bid) or at a 
specific price interval above the best offer (in the case of a 
Liquidity Offer). See Securities Exchange Act Release No. 47614 
(April 2, 2003), 68 FR 17140 (April 8, 2003) (File No. SR-NYSE-2002-
55).
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    The double-width relief must terminate automatically when the 
Triggering Event ceases. In this regard, the CBOE states that it will 
program its autoquote systems to widen the quote to double the bid-ask 
differential automatically upon the occurrence of either of the two 
Triggering Events.\9\ The quotes will remain double-width until the 
Triggering Event ceases, when the CBOE's systems automatically will 
return the quote to the normal bid-ask differential. Accordingly, if 
the primary market's quotes invert and the CBOE quotes double-wide, the 
CBOE's quotes must return to normal width when the underlying market's 
quotes no longer are inverted. Similarly, if the primary market prints 
a trade outside of its disseminated quote, the CBOE may quote double-
wide until the print is no longer outside of the disseminated quote 
(i.e., until the quotes move to encompass the previous print or the 
next print is inside of the disseminated quote).\10\ A market maker 
will be able to utilize the double-width relief only if the market 
maker has an automated quotation system that returns the market maker's 
quotes to normal width upon the termination of the Triggering 
Event.\11\ Double-width relief will not be available to market makers 
who must rely on manual input to restore quote values to normal 
width.\12\
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    \9\ See Amendment No. 1, supra note 3.
    \10\ See Amendment No. 3, supra note 5.
    \11\ See Amendment No. 3, supra note 5.
    \12\ See Amendment No. 3, supra note 5.
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III. Discussion

    The Commission 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 and, in 
particular, with the requirements of section 6(b)(5) of the Act,\13\ 
which requires, among other things, that the rules of a national 
securities exchange 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 to protect 
investors and the public interest.\14\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 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).

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[[Page 75674]]

    The Commission believes that the proposal to permit CBOE market 
makers to widen their quotes for options where the bid price is less 
than $2 under specific and limited circumstances is reasonable because 
when one of the Triggering Events occurs it may be difficult to 
accurately price an option based on the security. In addition, the 
Commission believes that CBOE's proposal to program its systems, or to 
requires its market makers to program their systems, to automatically 
widen the quote upon the occurrence of a Triggering Event and to 
automatically return the quote to its normal bid-ask differential when 
the Triggering Event ceases should ensure that the double-width relief 
is only used when permitted under the rule. Accordingly, the Commission 
believes that the proposal is narrowly tailored to permit quote width 
relief only in the specific and limited circumstances provided in the 
proposal.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-2003-25), as amended, 
is approved.
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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. 03-32176 Filed 12-30-03; 8:45 am]
BILLING CODE 8010-01-P