[Federal Register Volume 69, Number 120 (Wednesday, June 23, 2004)]
[Notices]
[Pages 35086-35087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14234]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49880; File No. SR-CBOE-2004-15]


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

June 17, 2004.
    On March 2, 2004, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with Securities and Exchange 
Commission (``Commission'') the proposed rule change, pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ to amend CBOE Rule 6.13 relating to 
access to the automatic execution feature of its Hybrid System. On 
April 28, 2004, the CBOE submitted Amendment No. 1 to the proposed rule 
change.\3\ The proposed rule change, as amended, was published for 
comment in the Federal Register on May 13, 2004.\4\ The Commission 
received no comment letters on the proposal. This order approves the 
proposed rule change, as amended.
---------------------------------------------------------------------------

    \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 clarified 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.
    \4\ See Securities Exchange Act Release No. 49659 (May 6, 2004), 
69 FR 26627.
---------------------------------------------------------------------------

    The Exchange currently trades equity options, as well as index and 
ETF options on the CBOE Hybrid System (``Hybrid'').\5\ Hybrid merges 
the electronic and open outcry trading models, offering CBOE market 
makers the ability to stream electronically their own market quotes.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release Nos. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (``Hybrid Release''), and 48953 
(December 18, 2003), 68 FR 75004 (December 29, 2003).
---------------------------------------------------------------------------

    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 Exchange proposes to amend 
CBOE Rule 6.13 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.
    The appropriate FPC would have the ability to allow options 
exchange market makers to have auto-ex access while stock exchange 
specialists would 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 applies only 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) 
would enable the appropriate FPC to make the access determinations on a 
class-by-class basis.
    Moreover, specialists' orders in their non-specialty stocks would 
be treated in the same manner as orders of broker-dealers that are not 
market makers or specialists on an options exchange and thus would be 
eligible for automatic execution in accordance with CBOE Rule 
6.13(b)(i)(C)(i).\6\ The proposed rule change would 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

[[Page 35087]]

orders, which is governed by CBOE Rule 6.13(b)(i)(C)(i).\7\
---------------------------------------------------------------------------

    \6\ See Amendment No. 1, supra note 3.
    \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.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of section 6 of the Act,\8\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\9\ In particular, the Commission finds that the proposed rule 
change, which would allow the appropriate FPC to provide different 
levels of access to auto-ex to options market makers and to stock 
exchange specialists, is consistent with section 6(b)(5) of the 
Act,\10\ which requires, among other things, that the Exchange's rules 
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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that providing different levels of access 
to options market makers and stock specialists is not unreasonable. 
Specifically, providing no access or less access to stock specialists 
in stocks in which they are specialists is not inappropriate, given the 
superior market information available to stock specialists in the 
stocks in which they act as specialists.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2004-15), as amended, 
is approved.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14234 Filed 6-22-04; 8:45 am]
BILLING CODE 8010-01-P