[Federal Register Volume 69, Number 81 (Tuesday, April 27, 2004)]
[Notices]
[Pages 22895-22896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49588; File No. SR-CBOE-2004-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Chicago Board Options Exchange, Inc., 
Relating to the $5 Quotation Spread Pilot Program

April 21, 2004.
    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 April 5, 2004, 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 CBOE. On April 20, 
2004, the CBOE filed Amendment No. 1 to the proposal.\3\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change, as amended, from interested persons.
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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 Nancy Sanow, Division 
of Market Regulation, Commission, dated April 19, 2004 (``Amendment 
No. 1''). Amendment No. 1 revises the text of the proposed rule to 
change a reference in CBOE Rule 8.7(b)(iv)(A) from ``subparagraph 
(iv)(a)'' to ``subparagraph (iv)(A).''
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In January 2004, the CBOE implemented a six-month pilot program 
(``Pilot Program''), which expires on June 29, 2004, that permits quote 
spread parameters of up to $5, regardless of the price of the bid, for 
up to 200 options classes traded on the CBOE's Hybrid Trading System 
(``Hybrid'').\4\ The CBOE subsequently expanded the Pilot Program to 
include all options classes traded on Hybrid.\5\ The CBOE proposes to 
amend the Pilot Program to limit the applicability of the $5 quote 
spreads permitted under the Pilot Program to quotations that are 
submitted electronically on the Hybrid system. The text of the proposed 
rule change appears below; additions are italicized.
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    \4\ See Securities Exchange Act Release No. 49153 (January 29, 
2004), 69 FR 5620 (February 5, 2004) (notice of filing and immediate 
effectiveness of File No. SR-CBOE-2003-50) (``Pilot Program 
Notice'').
    \5\ See Securities Exchange Act Release No. 49318 (February 25, 
2004), 69 FR 10085 (March 3, 2004) (notice of filing and immediate 
effectiveness of File No. SR-CBOE-2004-10) (``February 2004 
Notice'').
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8.7 Obligations of Market Makers
    (a) No change.
    (b)
    (i)-(iii) No change.
    (iv) To price options contracts fairly by, among other things, 
bidding and/or offering so as to create differences of no more than 
0.25 between the bid and offer for each option contract for which the 
bid is less than $2, no more than $0.40 where the bid is at least $2 
but does not exceed $5, no more than $0.50 where the bid is more than 
$5 but does not exceed $10, no more than $0.80 where the bid is more 
than $10 but does not exceed $20, and no more than $1 where the bid is 
more than $20, provided that the appropriate Market Performance 
Committee may establish differences other than the above for one or 
more options series. The bid/ask differentials stated above shall not 
apply to in-the-money series where the underlying securities market is 
wider than the differentials set forth above. For these series, the 
bid/ask differential may be as wide as the quotation on the primary 
market of the underlying security.
    (A) For a six month period expiring on June 29, 2004, options on 
classes trading on the Hybrid system may be quoted electronically with 
a difference not to exceed $5 between the bid and offer regardless of 
the price of the bid. The $5 quote widths shall only apply to classes 
trading on the Hybrid system and only following the opening rotation in 
each security (i.e., the widths specified in paragraph (b)(iv) above 
shall apply during opening rotation). Quotes given in open outcry in 
Hybrid classes may not be quoted with $5 widths and instead must comply 
with the legal width requirements (e.g., no more than 0.25 between the 
bid and offer for each option contract for which the bid is less than 
$2) described in paragraph (iv) and not subparagraph (iv)(A).
Interpretations and Policies * * *
    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 CBOE 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 CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the

[[Page 22896]]

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 Pilot Program became effective in January 2004 and designated 
200 options classes traded on Hybrid that, for a six-month pilot 
period, could be quoted with a difference not to exceed $5 between the 
bid and the offer, regardless of the price of the bid.\6\ In February 
2004, the CBOE expanded the number of options classes included in the 
Pilot Program from 200 options classes traded on Hybrid to all options 
classes traded on Hybrid.\7\
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    \6\ See Pilot Program Notice, supra note 4. The Pilot Program's 
relaxed quotation spread requirements apply after the opening 
trading rotation. During the opening trading rotation, market makers 
must quote in accordance with the traditional bid-ask width 
requirements. The $5 quotation requirements permitted under the 
Pilot Program become operative immediately following the opening 
rotation.
    \7\ See February 2004 Notice, supra note 5.
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    The CBOE proposes to amend the Pilot Program to limit its 
application to electronic quoting only. Under the proposal, market 
makers would continue to be eligible to submit electronic quotes in 
Hybrid classes, provided that those quotes do not exceed $5 between the 
bid and the ask price. In open outcry, however, market makers in those 
same classes would be required to give verbal quotes that comply with 
the current legal width requirements established in CBOE Rule 
8.7(b)(iv).\8\ This means that market makers would not be permitted to 
give verbal quotes in accordance with the terms of the Pilot Program.
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    \8\ Under CBOE Rule 8.7(b)(iv), the allowable bid-ask 
differentials are: $0.25 for options under $2, $0.40 for options 
between $2 and $5, $0.50 for options between $5 and $10, $0.80 for 
options between $10 and $20, and $1.00 for options above $20 
(``current legal widths'').
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    The effect of the proposal would be to restrict the number of 
instances in which market makers would be permitted to provide quotes 
that exceed the current legal widths.\9\ The CBOE notes that in open 
outcry, when a floor broker requests a market, a market maker has the 
ability to evaluate all pricing information publicly available prior to 
responding with a quote. Moreover, the CBOE notes that a market maker 
typically responds with one quote at a time, which substantially 
lessens the likelihood of multiple executions across different series. 
According to the CBOE, the ability to evaluate pricing information 
prior to giving a verbal quote is not a luxury that a market maker 
enjoys on the electronic side, where the market maker could execute 
numerous transactions before having the ability to adjust his or her 
quotes. For this reason, the CBOE believes that the need to be able to 
quote $5 wide is lessened substantially in open outcry.
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    \9\ See note 8, supra.
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2. Statutory Basis
    The CBOE believes that it is reasonable to limit the application of 
the Pilot Program to electronic quoting only. The CBOE believes that 
the proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\10\ 
Specifically, the CBOE believes that the proposed rule change is 
consistent with the Section 6(b)(5) \11\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts and, in general, to 
protect investors and the public interest.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition 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

    No written comments were solicited or received.

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:
    (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. Comments may be 
submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please 
include File Number SR-CBOE-2004-20 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-20. This 
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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
CBOE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
CBOE-2004-20 and should be submitted on or before May 18, 2004. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-9523 Filed 4-26-04; 8:45 am]
BILLING CODE 8010-01-P