[Federal Register Volume 69, Number 89 (Friday, May 7, 2004)]
[Notices]
[Pages 25646-25651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10466]



[[Page 25647]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49643; File No. SR-CBOE-2004-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated Allowing a New Type of Designated Primary 
Market-Maker--e-DPMs

April 30, 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 22, 2004, the Chicago Board Options Exchange, Incorporated 
(``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 30, 2004, the CBOE filed Amendment No. 1 to the proposed rule 
change.\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\ Amendment No. 1 replaces and supercedes the CBOE's original 
19b-4 filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its rules to allow remote competing 
Designated Primary Market-Makers (``DPMs'').
    Below is the text of the proposed rule change, as amended.\4\ 
Proposed new language is italicized.
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    \4\ Upon the Exchange's request, the Commission made a technical 
corrections to the proposed rule text. Telephone conversation 
between Angelo Evangelou, Senior Attorney, Legal Division, CBOE, and 
Deborah L. Flynn, Assistant Director, Division of Market Regulation, 
Commission, on April 30, 2004.
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* * * * *
Chicago Board Options Exchange, Incorporated
* * * * *
Rules
* * * * *

Rule 1.1 Definitions

    (a)-(ff) Unchanged.
    (gg) The term ``lessee'' means an individual or organization that 
has leased a transferable membership from the owner thereof in 
accordance with the provisions of Rule 3.17. For the duration of the 
lease agreement, a lessee shall be deemed to be a member[,]. Except as 
otherwise expressly provided in the Constitution or Rules, a lessee 
shall be subject to all of the provisions of the Constitution and Rules 
that are applicable to the owner of an Exchange membership[, except 
that the provisions of the Constitution and Rules, which] other than 
those provisions that concern the ownership of membership [are not 
applicable to a lessee].
    (hh)-(yy) Unchanged.
    .01-05 Unchanged.
* * * * *

Rule 3.3 Qualifications and Membership Statuses of Member Organizations

    (a)-(d) Unchanged.
    Interpretation and Policies:
    .02 Member organization membership statuses that are approved by 
Exchange bodies other than the Membership Committee (along with the 
primary Exchange Rule that provides for such approval) include: 
Designated Primary Market-Maker (Rule 8.83), Electronic DPMs (Rule 
8.92), SBT Designated Primary Market-Makers and SBT Lead Market-Makers 
(Rule 42.1).
* * * * *

Rule 6.23A Member Electronic Connectivity

    The Exchange may limit the number of messages sent by members 
accessing the Exchange electronically in order to protect the integrity 
of the Hybrid trading system. In addition, the Exchange may impose 
restrictions on the use of a computer connected through an API if it 
believes such restrictions are necessary to ensure the proper 
performance of the system. Any such restrictions shall be objectively 
determined and submitted to the Commission for approval pursuant to a 
rule change filing under Section 19(b) of the Exchange Act.
* * * * *

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

    Generally: The rules of priority and order allocation procedures 
set forth in this rule shall apply only to option classes designated by 
the Exchange to be traded on the CBOE Hybrid System. The term ``market 
participant'' as used throughout this rule refers to an in-crowd 
Market-Maker, a Market-Maker complying with the in-person requirements 
of Rule 8.7.03(B)(1) who submits quotes from off of the floor of the 
Exchange through the facilities of the Exchange, an in-crowd DPM, an e-
DPM, and a floor broker representing orders in the trading crowd. The 
term ``in-crowd market participant'' only includes an in-crowd Market-
Maker, in-crowd DPM, or floor broker representing orders in the trading 
crowd.
    (a) Allocation of Incoming Electronic Orders: The Exchange shall 
apply, for each class of options, the following rules of trading 
priority.
    (i) Ultimate Matching Algorithm (``UMA''): Under this method, [an 
in-crowd market maker, in-crowd DPM, or in-crowd floor broker 
representing orders (``market participant'')] a market participant who 
enters a quotation and whose quote is represented by the disseminated 
CBOE best bid or offer (``BBO'') shall be eligible to receive 
allocations of incoming electronic orders for up to the size of its 
quote, in accordance with the principles described below. As an initial 
matter, if the number of contracts represented in the disseminated 
quote is less than the number of contracts in an incoming electronic 
order(s), the incoming electronic order(s) shall only be entitled to 
receive a number of contracts up to the size of the disseminated quote, 
in accordance with Rule 6.45A(a)(i)(B). The balance of the electronic 
order will be eligible to be filled at the refreshed quote either 
electronically (in accordance with paragraph (a)(i)(B) below) or 
manually (in accordance with Rule 6.45A(b)) and, as such, may receive a 
split price execution.
    (A)-(B) No change.
    (C) DPM Participation Entitlement: If a DPM or e-DPM is eligible 
for an allocation pursuant to the operation of the Algorithm described 
in paragraph (a) of Rule 6.45A, the DPM or e-DPM shall be entitled to 
receive an allocation (not to exceed the size of the DPM's or e-DPM's 
quote) equal to either:
    (1) The greater of the amount [he] it would be entitled to pursuant 
to the [DPM] participation right established pursuant to Rule 8.87 (and 
Regulatory Circulars issued thereunder) or the amount [he] it would 
otherwise receive pursuant to the operation of the Algorithm described 
above provided, however, that in calculating the DPM's allocation under 
the Algorithm, DPMs utilizing more than one membership in the trading 
crowd where the subject class is traded shall count as two market 
participants for purposes of Component A of the Algorithm; or
    (2) the amount [he] it would be entitled to pursuant to the [DPM] 
participation right established pursuant to Rule 8.87 (and Regulatory 
Circulars issued thereunder).
    The appropriate FPC shall determine which of the preceding two 
entitlement formulas will be in effect for all classes under its 
jurisdiction. All

[[Page 25648]]

pronouncements regarding the entitlement formula shall be made via 
Regulatory Circular. The [DPM's] participation entitlement percentage 
is expressed as a percentage of the remaining quantity after all public 
customer orders in the electronic book have been executed.
    (b)-(d)No change.
    Interpretations and Policies:
    * * *
    No change.
* * * * *

Rule 8.87 Participation Entitlements of DPMs and e-DPMs

    (a) Subject to the review of the Board of Directors, the MTS 
Committee may establish from time to time a participation entitlement 
formula that is applicable to all DPMs.
    (b) [To the extent established pursuant to paragraph (a) of this 
Rule, each DPM shall have a right to participate for its own account 
with the Market-Makers present in the trading crowd in transactions in 
securities allocated to the DPM that occur at the DPM's previously 
established principal bid or offer.]
    The participation entitlement for DPMs and e-DPMs (as defined in 
Rule 8.92) shall operate as follows:
    (1) Generally.
    (i) To be entitled to a participation entitlement, the DPM/e-DPM 
must be quoting at the best bid/offer on the Exchange.
    (ii) A DPM/e-DPM may not be allocated a total quantity greater than 
the quantity that the DPM/e-DPM is quoting at the best bid/offer on the 
Exchange.
    (iii) The participation entitlement is based on the number of 
contracts remaining after all public customer orders in the book at the 
best bid/offer on the Exchange have been satisfied.
    (2) Participation Rates applicable to DPM Complex. The collective 
DPM/e-DPM participation entitlement shall be: 50% when there is one 
Market-Maker also quoting at the best bid/offer on the Exchange; 40% 
when there are two Market-Makers also quoting at the best bid/offer on 
the Exchange; and, 30% when there are three or more Market-Makers also 
quoting at the best bid/offer on the Exchange.
    (3) Allocation of Participation Entitlement Between DPMs and e-
DPMs. The participation entitlement shall be as follows: If the DPM and 
one or more e-DPMs are quoting at the best bid/offer on the Exchange, 
the e-DPM participation entitlement shall be one-half (50%) of the 
total DPM/e-DPM entitlement and shall be divided equally by the number 
of e-DPMs quoting at the best bid/offer on the Exchange. The remaining 
half shall be allocated to the DPM. If the DPM is not quoting at the 
best bid/offer on the Exchange and one or more e-DPMs are quoting at 
the best bid/offer on the Exchange, then the e-DPMs shall be allocated 
the entire participation entitlement (divided equally between them). If 
no e-DPMs are quoting at the best bid/offer on the Exchange and the DPM 
is quoting at the best bid/offer on the Exchange, then the DPM shall be 
allocated the entire participation entitlement. If only the DPM and/or 
e-DPMs are quoting at the best bid/offer on the Exchange (with no 
Market-Makers at that price), the participation entitlement shall not 
be applicable and the allocation procedures under Rule 6.45A shall 
apply.
* * * * *

Rule 8.92 Electronic DPM Program

    (a) Definition. An Electronic DPM (``e-DPM'') is a member 
organization that is approved by the Exchange to remotely function in 
allocated option classes as a DPM and to fulfill certain obligations 
required of DPMs except for Floor Broker and Order Book Official 
obligations. The DPM provisions of Rules 8.81 through 8.91 only apply 
to e-DPMs to the extent they are specifically referenced in Rules 8.92 
through 8.94.
    (b) No change.
    (c) Allocation of Option Classes. The Board of Directors or a 
committee designated by the Board of Directors shall grant e-DPMs 
allocations in option classes. Factors to be considered in granting 
allocations include performance, capacity, performance commitments, 
efficiency, competitiveness, and operational factors. In addition, the 
following shall apply:
    (i) More than one e-DPM may be allocated to the same option class;
    (ii) Option classes that have been allocated to a DPM may be 
concurrently allocated to e-DPMs.
    (iii) An e-DPM's allocation in an option class or group of classes 
is non-transferable unless approved by the Exchange.
    (iv) The Exchange may impose a minimum number of option classes for 
which an e-DPM may be allocated.
    (v) An e-DPM may not be allocated an option class for which the e-
DPM organization serves as DPM on the trading floor.
    (d) Membership Requirement. Until [insert date 3 years from 
Commission approval of program], each e-DPM organization is required to 
(i) own one Exchange membership for every 30 products allocated to the 
e-DPM; or (ii) lease one Exchange membership for every 20 products 
allocated to the e-DPM. After [insert same date] each e-DPM 
organization is required to own one Exchange membership for every 30 
products allocated to the e-DPM. An Exchange membership shall include a 
transferable regular membership or a Chicago Board of Trade full 
membership that has effectively been exercised pursuant to Article 
Fifth(b) of the Certificate of Incorporation. Memberships used to 
satisfy this requirement may not be used for any other purpose 
including being leased to another member, to comply with the DPM 
membership ownership requirement of Rule 8.85(e), or for trading on the 
trading floor. For purposes of this Rule, the term ``product'' refers 
to all options of the same single underlying security/value.
    (e) Trade Participation. e-DPMs shall participate in trades as set 
forth in Rules 6.45A and 8.87.
* * * * *

Rule 8.93. e-DPM Obligations

    Each e-DPM shall fulfill all of the obligations of a Market-Maker 
and of a DPM under the Rules (except those contained in Rules 
8.85(a)(iv) and (vii)-(x), 8.85(b), 8.85(c)(i) and (v), and 8.85(e)), 
and shall satisfy each of the following requirements:
    (i) provide continuous two-sided quotations in at least 90% of the 
series of each allocated class, or alternatively, respond to 98% of 
Requests for Quotes (RFQs) if RFQ functionality is enabled as 
determined by the Exchange;
    (ii) assure that its market quotations are accurate;
    (iii) comply with the bid/ask differential requirements of Rule 
8.7(b)(iv);
    (iv) assure that its market quotations comply with the minimum size 
requirements prescribed by the Exchange which shall be no less than 10 
contracts;
    (v) continue to act as an e-DPM and to fulfill all of the e-DPM's 
obligations as an e-DPM until the Exchange relieves the e-DPM of its 
approval and obligations to act as an e-DPM;
    (vi) make competitive markets on the Exchange and otherwise to 
promote the Exchange in a manner that is likely to enhance the ability 
of the Exchange to compete successfully for order flow in the classes 
it trades;
    (vii) as part of a pilot program until [insert 18 months after date 
of approval], not allow more than one market-maker affiliated with the 
e-DPM organization to trade on CBOE's trading floor in any specific 
option class allocated to the e-DPM and provided

[[Page 25649]]

such market-maker is trading on a separate membership (absent the pilot 
program, an e-DPM may not allow any market-makers affiliated with the 
e-DPM organization to trade on CBOE's trading floor in any class 
allocated to the e-DPM);
    (viii) immediately notify the Exchange of any material operational 
or financial changes to the e-DPM organization as well as obtain the 
Exchange's approval prior to effecting changes to the ownership, 
capital structure, voting authority, distribution of profits/losses, or 
control of the e-DPM organization;
    (ix) provide members with telephone access to a designated employee 
at all times during market hours for purposes of resolving problems 
involving trading on the Exchange; and
    (x) maintain information barriers that are reasonably designed to 
prevent the misuse of material, non-public information with any 
affiliates that may conduct a brokerage business in option classes 
allocated to the e-DPM or act as specialist or market maker in any 
security underlying options allocated to the e-DPM, and otherwise 
comply with the requirements of Rule 4.18 regarding the misuse of 
material non-public information.
* * * * *

Rule 8.94. Review of e-DPM Operations and Performance

    (a) Review. The Exchange may conduct a review of an e-DPM's 
operations or performance at any time. Such review may include, among 
other things, an evaluation of the extent to which the e-DPM has 
satisfied its obligations under Rule 8.93. An e-DPM shall submit to the 
Exchange such information requested by the Exchange in connection with 
a review of the e-DPM's operations or performance on the Exchange.
    (b) Revocation of Fee Rate. The Exchange may, pursuant to a rule 
change filed with the Commission under Section 19(b) of the Exchange 
Act, adopt rules detailing objective criteria upon which e-DPMs' fee 
rates shall be reviewed. The criteria may include average quote size, 
average quote width, the percentage of time an e-DPM is quoting at the 
NBBO, and other objective performance related measurements. e-DPMs that 
fail to meet the objective standards may be summarily required to 
adhere to fee rates applicable to non-e-DPM Market-Makers.
    (c) Termination and other limitations. The Exchange may terminate, 
place conditions upon, or otherwise limit a member organization's 
approval to act as an e-DPM on the same basis that DPM privileges may 
be terminated and/or conditioned under Rules 8.60 and 8.90. If a member 
organization's approval to act as an e-DPM is terminated, conditioned, 
or otherwise limited by the Exchange pursuant to this Rule, the member 
organization may seek review of that decision under Chapter XIX of the 
Rules.
* * * * *

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 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
    In 2003, CBOE introduced the Hybrid Trading System, an electronic 
trading platform integrated with CBOE's floor-based open-outcry auction 
market.\5\ CBOE now proposes to enhance the liquidity base of the 
Hybrid platform by adding a new category of CBOE market making 
participant-electronic DPMs (``e-DPMs''). e-DPMS will be member 
organizations appointed to operate on CBOE as competing DPMs in a broad 
number of option classes. e-DPMs will act as specialists on CBOE by 
entering bids and offers electronically from locations other than the 
trading crowds where the applicable options classes are traded, and 
will not be required to have traders physically present in the trading 
crowd. As specialists, e-DPMs will share in the DPM participation right 
in their allocated classes.
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    \5\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003).
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    e-DPMs will be expected to attract order flow to the Exchange in 
allocated securities and to quote competitively. They will have special 
eligibility requirements and will have to meet market performance 
standards and certain obligations including quoting requirements. e-
DPMs will be evaluated on how well they fulfill their market-making 
obligations as specialists, as well as on how successful they are at 
attracting order flow to the Exchange in allocated securities. e-DPMs 
may apply for and be granted an appointment in any option classes on 
the Hybrid Trading System other than those in which they are already 
operating as the DPM on the floor of the Exchange.\6\
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    \6\ The process and rules by which e-DPMs would be appointed was 
submitted to the Commission under a separate rule filing (SR-CBOE-
2004-17). See Securities Exchange Act Release 49577 (April 19, 
2004), 69 FR 22576 (April 26, 20040).
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e-DPM Allocated Classes
    e-DPMs will be required to accept allocations in a broad number of 
options classes, as determined by the Exchange. All classes allocated 
by the Exchange to an e-DPM shall constitute the e-DPM's appointment. 
e-DPMs will have specific quoting obligations governing all classes 
comprising their appointment, as discussed below.
e-DPM Quoting Obligations
    e-DPMs must continuously quote 90% of the series in each of their 
allocated classes, with a minimum size of at least 10 contracts. If an 
electronic request-for-quote (``RFQ'') functionality is activated for 
Hybrid classes,\7\ e-DPMs will have additional or alternative 
obligations regarding RFQs. For example, they will be obligated to 
respond to at least 98% of RFQs in their appointed classes (as is the 
standard for SBT DPMs under CBOE Rule 44.14). All e-DPM quotations must 
be firm and must comply with the maximum bid-ask width requirements 
contained in CBOE Rule 8.7(b)(iv).
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    \7\ The RFQ functionality exists for trading on CBOEdirect, the 
Exchange's purely screen-based trading platform.
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Participation Entitlement
    CBOE proposes to modify certain aspects of the DPM participation 
entitlement to accommodate the e-DPM program. Participation rights are 
granted to a DPM when the DPM is quoting on the prevailing bid or 
offer. CBOE's current DPM participation rights are 30%, 40%, or 50%.\8\ 
Under this proposal, DPMs and e-DPMs (the ``DPM Complex'') will share 
in the existing DPM participation entitlement with the e-DPM 
participation right coming out of the existing DPM participation right 
established under CBOE Rule 8.87. CBOE proposes to codify the revised 
participation right applicable to the DPM Complex.
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    \8\ If there is one Market-Maker quoting with the DPM, the DPM 
entitlement is 50%. If there are two Market-Makers quoting with the 
DPM, the DPM entitlement is 40%. If there are three or more Market-
Makers quoting with the DPM, the DPM entitlement is 30%.
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    The allocation of the DPM participation entitlement shall be shared 
as follows: If the DPM and one or more

[[Page 25650]]

e-DPMs are quoting at the best bid/offer on CBOE, the e-DPM 
participation entitlement shall be one-half (50%) of the total DPM 
Complex entitlement and shall be divided equally by the number of e-
DPMs quoting at the best bid/offer on CBOE. The DPM shall retain the 
other half of the entitlement. As proposed in CBOE Rule 6.45A, e-DPMs 
would receive allocations based on the greater of the participation 
entitlement or what the e-DPM would otherwise receive via CBOE's 
Ultimate Matching Algorithm (``UMA'') (an e-DPM will never receive an 
allocation greater than the size of the e-DPM's quote). If, however, 
only the DPM and/or e-DPMs are quoting at the best bid/offer on CBOE 
and there are no Market-Makers quoting with them, there shall be no 
DPM/e-DPM participation entitlement and instead the allocation 
procedures under CBOE Rule 6.45A shall apply.
Other Considerations
    CBOE proposes, as a pilot program for an 18-month period commencing 
on Commission approval of this proposal, that an e-DPM may choose to 
have up to one separate affiliated Market-Maker physically present in 
trading crowds where it operates as an e-DPM (such Market-Maker would 
be required to trade on a separate membership).\9\ This Market-Maker 
will be allowed all the privileges of any other Market-Maker and will 
have all of the responsibilities of any other Market-Maker. Because 
non-DPM Market-Makers do not receive guarantees in connection with 
participation on orders, this in no way will impact the guaranteed 
participation percentages applicable to e-DPMs.
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    \9\ As part of the pilot program, CBOE will confidentially 
provide the Commission with data on (1) the size or orders that 3-
DPMs and affilaited Market-Makers both trade with electronically; 
(2) the price and size of the e-DPM's and the affiliated Market-
Maker's respective quotes; (3) the price and size of quotes of other 
participants in classes where an e-DPM and an affilaite are quoting; 
and, (4) a brakdown of how orders are allocated to the e-DPM, the 
affilaited Maket-Maker, and any other participants.
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    Because DPMs will receive a smaller participation entitlement (but 
will continue to need multiple memberships to effectively operate a DPM 
trading crowd and will continue to fulfill agency and other 
obligations), the Exchange proposes to allow DPMs that use more than 
one membership in any given trading crowd to increase their ability to 
participate via UMA. This will be effected by increasing the DPM's 
``A'' component in the UMA calculation by one.\10\ CBOE believes this 
will have no impact on the DPM's participation guarantees.
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    \10\ The ``A'' componet of UMA represents 1 over the total 
number of market participants on the market. UMA currently gives 
weighting to the ``A'' and ``B'' components. When the DPM is given 
credit for the additional seat both the numerator and the 
denominator are increased (e.g., \1/4\ becomes \2/5\).
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    On many exchanges the specialist receives a 40% guarantee when 
there are at least three other market makers present and quoting in a 
security. 40% appears to be the maximum guaranteed percentage allowed 
by the Commission at this time (provided at least three market makers 
are quoting). On CBOE, the DPM is only entitled to 30% in such cases. 
To the extent this extra ``A'' component could be considered a 
``guarantee'' (and even though a DPM would not receive an allocation on 
any trade pursuant to both the participation entitlement and UMA), CBOE 
represents that it would not allow the incremental amount a DPM 
receives because of a second ``A'' component to cause the DPM to exceed 
a 40% ``guarantee'' threshold. For example: assume a DPM and three 
Market-Makers are each quoting the same size at the NBBO and a 100-
contract order is received. The DPM participation entitlement in that 
case is 30% (or 30 contracts). Currently (using just one ``A'' 
component for the DPM), the ``A'' component would account for 12.5 
contracts (half of \1/4\). By giving the DPM an extra ``A'' component, 
the total contracts due to the DPM as a result of the ``A'' component 
would equal 20 (half of \2/5\). Thus, the incremental gain attributable 
to the second ``A'' component is 7.5 contracts (20 minus 12.5). The 
additional 7.5% plus the 30% guarantee does not exceed 40%, and the 
37.5% figure can only decrease as the number of Market-Makers on the 
quote increases (i.e. the example given is the most drastic scenario).
Message Traffic
    Recognizing that multiple entities remotely streaming continuous 
quotes to CBOE in the same products will increase message traffic, the 
Exchange is also adding proposed CBOE Rule 6.23A (which is based on 
CBOE Rule 44.6 applicable to CBOE's screen-based trading system, 
CBOEdirect) providing that the Exchange may limit the number of 
messages sent by members accessing the Exchange electronically to 
ensure proper performance of the system.
Membership Ownership Requirement
    As proposed, e-DPMs must own or lease CBOE or Chicago Board of 
Trade (exercised) memberships as follows. Each membership that an e-DPM 
owns will entitle the e-DPM to stream quotes into 30 classes. Each 
membership that an e-DPM leases will entitle the e-DPM to stream quotes 
into 20 classes. For example, an e-DPM quoting 420 classes needs to own 
14 seats, lease 21 seats, or use some combination of owned and leased 
seats sufficient to make the e-DPM eligible to quote 420 classes. At 
the end of three years, every e-DPM will be required to own seats to 
satisfy this requirement and thereafter the e-DPM may no longer be 
allowed to use leased seats for this purpose.
Review of Operations and Performance
    Reviews of e-DPM performance would be conducted under proposed CBOE 
Rule 8.94. Furthermore, proposed CBOE Rule 8.94 would provide that the 
Exchange may, pursuant to a rule change filed with the Commission under 
section 19(b) of the Exchange Act, adopt rules detailing objective 
criteria upon which e-DPMs' fee rates shall be reviewed. The criteria 
may include average quote size, average quote width, the percentage of 
time an e-DPM is quoting at the NBBO, and other objective performance 
related measurements. e-DPMs that fail to meet the objective standards 
could be summarily required to adhere to fee rates applicable to 
certain non-e-DPM Market-Makers.
    Lastly, proposed CBOE Rule 8.94 provides that the Exchange may 
terminate, place conditions upon, or otherwise limit a member 
organization's approval to act as an e-DPM on the same basis that DPM 
privileges may be terminated and/or conditioned under CBOE Rules 8.60 
and 8.90, and that if a member organization's approval to act as an e-
DPM is terminated, conditioned, or otherwise limited by the Exchange 
pursuant to this Rule, the member organization may seek review of that 
decision under Chapter XIX of the Rules.
2. Statutory Basis
    By expanding CBOE's liquidity base and market making possibilities 
on the Exchange to include remote market making by e-DPMs, the Exchange 
believes the proposed rule change, as amended, is consistent with 
section 6(b) of the Act \11\ in general and furthers the objectives of 
sections 6(b)(5)\12\ of the Act in particular in that that it should 
promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).

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[[Page 25651]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE believes that the proposed rule change does not 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

    No written comments were solicited or received with respect to 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:
    (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-2004-24 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-2004-24. 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-2004-24 and should be submitted on or before May 28, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-10466 Filed 5-6-04; 8:45 am]
BILLING CODE 8010-01-P