[Federal Register Volume 69, Number 93 (Thursday, May 13, 2004)]
[Notices]
[Pages 26627-26629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10846]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49659; File No. SR-CBOE-2004-15]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to Automatic Executions for Underlying 
Specialists

May 6, 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 March 2, 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 28, 
2004, the CBOE filed an amendment 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\ See letter from Steve Youhn, Counsel, CBOE, to Deborah 
Flynn, Assistant Director, Division of Market Regulation 
(``Division'') Commission, dated April 27, 2004 (``Amendment No. 
1''). Amendment No. 1 clarifies the access to the Exchange's 
automated execution system for stock exchange specialists' orders in 
options classes overlying stocks in which they are not specialists.
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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 CBOE Rule 6.13 relating to access to the 
automatic execution feature of its Hybrid System. The text of the 
proposed rule change appears below. Proposed new language is in 
italics; proposed deletions are in [brackets].
* * * * *
Rule 6.13: CBOE Hybrid System's Automatic Execution Feature
    (a) No change.
    (b) Automatic Execution.
    (i) Eligibility: Orders eligible for automatic execution through 
the CBOE Hybrid System may be automatically executed in accordance with 
the provisions of this Rule. This section governs automatic executions 
and split-price automatic executions. The automatic execution and 
allocation of orders or quotes submitted by market participants shall 
be governed by Rules 6.45A(c) and (d).
    (A)-(B) No change.
    (C) Access:
    (i) Non-broker-dealer public customers and broker-dealers that are 
not market makers or Specialists on an options exchange who are exempt 
from the provisions of Regulation T of the Federal Reserve Board 
pursuant to section 7(c)(2) of the Securities Exchange Act of 1934 are 
eligible for automatic execution. The eligible order size for these 
classifications must be the same.
    (ii) (A) Options Exchange Market Makers: The appropriate FPC may 
also determine, on a class-by-class basis, to allow orders for the 
accounts of market makers or specialists on an options exchange 
(collectively ``options market makers'') who are exempt from the

[[Page 26628]]

provisions of Regulation T of the Federal Reserve Board pursuant to 
section 7(c)(2) of the Securities Exchange Act of 1934 to be eligible 
for automatic execution. The appropriate FPC may establish the maximum 
order size eligibility for such options market maker [or specialist] 
orders at a level lower than the maximum order size eligibility 
available to non-broker-dealer public customers and non-market maker or 
non-specialist broker-dealers. Pronouncements pursuant to this 
provision regarding [BD] options market maker access shall be made by 
the appropriate FPC and announced via Regulatory Circular.
    (B) Stock Exchange Specialists: The appropriate FPC may determine, 
on a class-by-class basis, to allow orders for the account of a stock 
exchange specialist, with respect to a security in which it acts as a 
specialist, to be eligible for automatic execution in the overlying 
option class. The appropriate FPC may establish the maximum order size 
eligibility for such specialist orders at a level lower than the 
maximum order size eligibility available to options exchange market 
makers. Stock exchange specialists, with respect to orders in 
securities in which they do not act as specialist, will be treated as 
broker-dealers that are not market makers or specialists on an options 
exchange and will be eligible to submit orders for automatic execution 
in accordance with subparagraph (i) above.
    (ii)-(iv) No change.
    (c)-(e) 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 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 most significant parts of such 
statements.

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

1. Purpose
    In May 2003, the Commission approved the CBOE's Hybrid System 
(``Hybrid'').\4\ Hybrid 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. CBOE Rule 6.13 governs Hybrid's automatic 
execution (``auto-ex'') feature. Currently, CBOE Rule 6.13(b)(i)(C)(ii) 
allows the appropriate floor procedure committee (``FPC'') to determine 
whether to provide all market makers and specialists, whether on an 
options or stock exchange, with auto-ex access to CBOE's markets. The 
purpose of this filing is to amend this section to allow the FPC to 
provide different levels of auto-ex access to: (i) Options exchange 
market makers and specialists (collectively, ``options market 
makers''); and (ii) stock exchange specialists.
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    \4\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (``Hybrid Release''). In December 
2003, CBOE submitted a rule filing for immediate effectiveness, 
which permits the trading of index options and options on ETFs on 
the Hybrid System. See Securities Exchange Act Release No. 48953 
(December 18, 2003), 68 FR 75004 (December 29, 2003).
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    Under the proposal, the appropriate FPC will have the ability to 
allow options exchange market makers to have auto-ex access while stock 
exchange specialists do not have auto-ex access. Alternatively, the 
appropriate FPC may determine to set the auto-ex eligible order size 
level higher for options market makers than the corresponding order 
size level for stock exchange specialists. The proposal only applies to 
stock exchange specialists with respect to their options transactions 
in classes overlying stocks in which they are specialists. Further, the 
Exchange states that proposed CBOE Rule 6.13(b)(i)(C)(ii)(A) and (B) 
will enable the appropriate FPC to make the access determinations on a 
class-by-class basis. As such, proposed subparagraph (A) of CBOE Rule 
6.13(b)(i)(C)(ii) clarifies that the appropriate FPC may determine, on 
a class-by-class basis, to allow options market makers to receive 
automatic execution. Further, proposed subparagraph (B) of CBOE Rule 
6.13(b)(i)(C)(ii) allows the FPC to determine access treatment, on a 
class-by-class basis, with respect to stock exchange specialists' 
orders in their specialty stocks.\5\
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    \5\ See Amendment No. 1, supra note 3. The Commission notes 
that, pursuant to CBOE Rule 6.13(b)(i)(C)(i), stock exchange 
specialists' orders in their non-specialty stocks will be eligible 
for automatic execution to the same extent as orders from public 
customers and broker-dealers that are not market makers on an 
options exchange.
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    With respect to the access treatment of specialists' orders in 
their non-specialty stocks, the Exchange clarifies, in proposed CBOE 
Rule 6.13 (b)(i)(C)(ii)(B), that these orders will be treated in the 
same manner as orders of broker-dealers that are not market makers or 
specialists on an options exchange and thus will be eligible for 
automatic execution in accordance with CBOE Rule 6.13(b)(i)(C)(i).\6\
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    \6\ Id.
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    The proposed amendment does not affect a responsible broker-
dealer's firm quote obligations to broker-dealer orders (which includes 
options market makers and stock specialists), which will remain at one 
contract. Similarly, the proposal does not affect the auto-ex access 
currently available to public customer and non-market-maker/specialist 
broker-dealer orders, which is governed by CBOE Rule 
6.13(b)(i)(C)(i).\7\
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    \7\ At the request of the Exchange staff, the citation of CBOE 
Rule 6.13(b)(i)(B)(i) was amended to refer to CBOE Rule 
6.13(b)(i)(C)(i). Telephone conversation between Steve Youhn, 
Counsel, CBOE, and Hong-Anh Tran, Special Counsel, Division, 
Commission on April 28, 2004.
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2. Statutory Basis
    The Exchange believes it is reasonable and consistent with Section 
6(b)(5) of the Act \8\ to distinguish between options market makers and 
stock exchange specialists for several reasons. First, underlying stock 
specialists have a distinct timing advantage with respect to stock 
price movements. This advantage could allow them to submit large 
options orders to hedge their risk before the same information publicly 
is available to CBOE market makers. This does not create a level 
playing field. Second, options market makers often need to sell stock 
short to hedge their positions. The existence of the ``uptick rule'' on 
a stock exchange can make hedging by options market makers extremely 
difficult, thereby subjecting them to even greater risk. This is 
exacerbated when a stock market specialist has already hedged its 
position through options transactions on CBOE. Third, some stock 
exchanges limit access to their automatic execution systems. For 
example, NYSE Direct+ currently allows automatic executions for up to 
1099 shares. Providing the stock market specialist with electronic 
access to our full disseminated size while our market makers may only 
be able to access 1099 shares electronically gives the stock specialist 
a distinct advantage in terms of hedging risk.
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    \8\ 15 U.S.C. 78f(b)(5).
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    For these reasons, the Exchange believes the proposed rule change, 
as amended, is consistent with the Act and the rules and regulations 
under the Act applicable to a national securities exchange and, in 
particular, the

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requirements of Section 6(b) of the Act.\9\ Specifically, the Exchange 
believes the proposed rule change, as amended, is consistent with the 
Section 6(b)(5)\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change, as amended, 
will impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange 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

    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 self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, 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 for (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2004-15 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-2004-15. 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 20549-0609. 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-2004-15 and should be submitted on or before June 3, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-10846 Filed 5-12-04; 8:45 am]
BILLING CODE 8010-01-P