[Federal Register Volume 69, Number 111 (Wednesday, June 9, 2004)]
[Notices]
[Page 32389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12996]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49791; File No. SR-CBOE-2004-20]


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

June 2, 2004.

I. Introduction

    On April 5, 2004, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), 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 limit the applicability of the 
$5 quote spreads permitted under the CBOE's quote spread pilot program 
(``Pilot Program'') \3\ to quotations that are submitted electronically 
to the CBOE's Hybrid Trading System (``Hybrid''). The CBOE filed 
Amendment No. 1 to the proposal on April 20, 2004.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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) (implementing the Pilot 
Program through June 29, 2004) (``Pilot Program Notice'').
    \4\ See letter from Steve Youhn, CBOE, to Nancy Sanow, Division 
of Market Regulation, Commission, dated April 19, 2004 (``Amendment 
No. 1''). In Amendment No. 1, CBOE revised 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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    The proposed rule change and Amendment No. 1 were published for 
comment in the Federal Register on April 27, 2004.\5\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change, as amended.
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    \5\ See Securities Exchange Act Release No. 49588 (April 21, 
2004), 69 FR 22895.
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II. Description of the Proposal

    In January 2004, the CBOE implemented a six-month 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 Hybrid.\6\ The CBOE subsequently expanded the Pilot 
Program to include all options classes traded on Hybrid.\7\ 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 to Hybrid. Thus, under the proposal, 
market makers in Hybrid classes would not be permitted to give verbal 
quotes in open outcry in accordance with the terms of the Pilot 
Program. Instead, market makers quoting Hybrid classes in open outcry 
would be required to give verbal quotes that comply with the quote 
width requirements established in CBOE Rule 8.7(b)(iv).\8\
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    \6\ See Pilot Program Notice, supra note 3.
    \7\ 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).
    \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.
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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 \9\ and, in 
particular, with the requirements of Section 6(b)(5) of the Act,\10\ 
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.
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    \9\ 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).
    \10\ 15 U.S.C. 78f(b)(5).
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    As described more fully above, the proposal limits the quote width 
relief provided under the Pilot Program to options quotations that are 
submitted electronically to Hybrid. In its proposal, the CBOE noted 
that, unlike an options market maker quoting in open outcry, an options 
market maker quoting electronically could execute numerous transactions 
before having the ability to adjust his or her quotes to reflect new 
pricing information. For this reason, a market maker quoting in open 
outcry has less need for the quote spread relief provided under the 
Pilot Program than a market maker quoting electronically. Accordingly, 
by limiting the Pilot Program to quotes that are submitted 
electronically to Hybrid, the Commission believes that the proposal is 
designed to tailor the quote spread relief provided under the Pilot 
Program to the circumstances where it is most likely to be needed, 
thereby protecting investors and the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2004-20), as amended, 
is approved on a pilot basis until June 29, 2004.
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    \11\ 15 U.S.C. 78s(b)(2).

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-12996 Filed 6-8-04; 8:45 am]
BILLING CODE 8010-01-P