[Federal Register Volume 69, Number 127 (Friday, July 2, 2004)]
[Notices]
[Pages 40422-40424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15083]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49916; File No. SR-CBOE-2004-35]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Amend CBOE Rule 
8.85 to Require the Immediate Display of Customer Limit Orders

June 25, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on June 17, 2004, the Chicago Board Options 
Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II and, III below, which Items have 
been prepared by CBOE. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE Rule 8.85 to require the immediate 
display of customer limit orders. The text of the proposed rule change 
follows. Additions are in italics. Deletions are in [brackets].
* * * * *

Rule 8.85 DPM Obligations

    (a) No change.
    (b) Agency Transactions. Each DPM shall fulfill all of the 
obligations of a Floor Broker (to the extent that the DPM acts as a 
Floor Broker) and of an Order Book Official under the Rules, and shall 
satisfy each of the [following] requirements contained in this 
paragraph, in respect of each of the securities allocated to the 
DPM[:]. To the extent that there is any inconsistency between the 
specific obligations of a DPM set forth in subparagraphs (b)(i) through 
(b)(vii) of this Rule and the general obligations of a Floor Broker or 
of an Order Book Official under the Rules, subparagraphs (b)(i) through 
(b)(vii) of this Rule shall govern.
    [(i) place in the public order book any order in the possession of 
the DPM which is eligible for entry into the book unless (A) the DPM 
executes the order upon its receipt or (B) the customer who placed the 
order has requested that the order not be booked, and upon receipt of 
the order, the DPM announces in public outcry the information 
concerning the order that would be displayed if the order were a 
displayed order in the public order book;]
    (i) Display Obligation: Each DPM shall display immediately the full 
price and size of any customer limit order that improves the price or 
increases the size of the best disseminated CBOE quote. ``Immediately'' 
means, under normal market conditions, as soon as practicable but no 
later than 30 seconds after receipt (``30-second standard'') by the 
DPM. The term ``customer limit order'' means an order to buy or sell a 
listed option at a specified price that is not for the account of 
either a broker or dealer; provided, however, that the term customer 
limit order shall include an order transmitted by a broker or dealer on 
behalf of a customer.
    (A) An order executed upon receipt;
    (B) An order where the customer who placed it requests that it not 
be displayed, and upon receipt of the order, the DPM announces in 
public outcry the information concerning the order that would be 
displayed if the order were subject to being displayed;
    (C) An order delivered immediately upon receipt to another options 
exchange that is a participant in the Intermarket Options Linkage Plan;
    (D) The following orders as defined in Rule 6.53: contingency 
orders; not-held orders; one-cancels-the-other orders; all or none 
orders; fill or kill orders; immediate or cancel orders; complex orders 
(e.g., spreads, straddles, combinations); and stock-option orders;
    (E) Orders received before or during a trading rotation (as defined 
in Rule 6.2, 6.2A, and 6.2B), including Opening Rotation Orders as 
defined in Rule 6.53(l), are exempt from the 30-second standard, 
however, they must be displayed immediately upon conclusion of the 
applicable rotation; and
    (F) Large Sized Orders: Orders for more than 100 contracts, unless 
the customer placing such order requests that the order be displayed.
    (ii)-(v) No change.
    (vi) not represent discretionary orders as a Floor Broker or 
otherwise.
    [To the extent that there is any inconsistency between the specific 
obligations of a DPM set forth in subparagraphs (b)(i) through (b)(vi) 
of this Rule and the general obligations of a Floor Broker or of an 
Order Book Official under the Rules, subparagraphs (b)(i) through 
(b)(vi) of this Rule shall govern.]
    (vii) No change.
    [To the extent that there is any inconsistency between the specific 
obligations of a DPM set forth in subparagraphs (b)(i) through (b)(vi) 
of this Rule and the general obligations of a Floor Broker or of an 
Order Book Official under the Rules, subparagraphs (b)(i) through 
(b)(vii) of this Rule shall govern.]
    (c)-(e) No change.

* * * 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, 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. 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
    Rule 11Ac1-4 under the Act,\3\ the Commission's Limit Order Display 
Rule, requires that immediately upon receipt, equity market specialists 
and OTC market makers either display in their quotes qualified customer 
limit orders that improve the price or size or execute or re-route 
those orders to other market centers. Under the Commission's Limit 
Order Display Rule, to comply with the requirement that display take 
place ``immediately,'' specialists and market makers must display (or 
execute or re-

[[Page 40423]]

route) eligible customer limit orders ``as soon as is practicable after 
receipt which, under normal market conditions, would require display no 
later than 30 seconds after receipt.'' \4\ The Commission's Limit Order 
Display Rule currently does not apply to the options markets.
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    \3\ See 17 CFR 240.11Ac1-4.
    \4\ See Securities Exchange Act Release No. 37619A (September 6, 
1996), 61 FR 48290 (September 12, 1996).
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    CBOE proposes to amend CBOE Rule 8.85(b)(i) to codify an immediate 
display requirement with respect to eligible customer limit orders 
(``Display Obligation''). As proposed, each DPM would be required to 
display immediately the full price and size of any customer limit order 
that improves the price or increases the size of the best disseminated 
CBOE quote. As proposed, CBOE defines ``immediately'' to mean, under 
normal market conditions, as soon as practicable but no later than 30-
seconds after receipt by the DPM.\5\ CBOE proposes to define the term 
``customer limit order'' as follows: An order to buy or sell a listed 
option at a specified price that is not for the account of either a 
broker or dealer; provided, however, that the term customer limit order 
shall include an order transmitted by a broker or dealer on behalf of a 
customer.
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    \5\ In this respect, CBOE states that ``receipt by the DPM'' 
means receipt on the PAR terminal in the DPM trading crowd, which is 
consistent with the firm quote definition of ``time of receipt.'' 
This means that the time of receipt is when the order is received on 
PAR, even if the DPM or PAR operator does not happen to see it for 
several seconds.
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    CBOE proposes to exempt, or partially exempt, certain order types 
from the Display Obligation. CBOE also proposes to exempt an order 
executed upon receipt and an order where the customer who placed it 
requests that it not be displayed, and upon receipt of the order, the 
DPM announces in public outcry the information concerning the order 
that would be displayed if the order were subject to being displayed. 
CBOE further proposes that orders delivered immediately upon receipt to 
another options exchange that is a participant in the Intermarket 
Options Linkage Plan be exempted from the Display Obligation.
    CBOE also proposes to exempt the following types of orders from its 
Display Obligation:

Contingency Orders

    Market-if-Touched (CBOE Rule 6.53(c)(i)) and Stop (stop-loss) 
Orders (CBOE Rule 6.53(c)(iii))--These orders are not executable until 
the market reaches a specified ``trigger'' price, at which point each 
converts to a market order. As such, they are not available to trade 
and have no standing in the quoted markets until the specified price 
trigger is reached. A trade must be the triggering event for a Market-
if-Touched order; a trade or a quote can be the triggering event for a 
Stop order. Because they convert to market orders upon the triggering 
event, these order types cannot then be subject to the display 
requirement. Instead, they are subject to the firm quote requirements.
    Market on Close Orders (``MOC'') (CBOE Rule 6.53(c)(ii))--While an 
MOC may have a limit price attached, it is not eligible for 
representation until the close of trading is imminent. Regardless of 
the time at which an MOC order is entered, the DPM is required to hold 
such order, and is precluded from representing, displaying or booking 
it, until as near as possible to the close of trading. Furthermore, 
because representation and execution of these orders must occur on or 
as near to the close of trading as possible, it would be difficult if 
not impossible to determine whether members met an appropriate display 
standard for such orders.
    Stop Limit Order (CBOE Rule 6.53(c)(iv))--A Stop-Limit order is not 
``triggered'' until the option contract trades or is bid (offered) at 
or above (below) the stop price, at which point it converts to a limit 
order. As such, a Stop-Limit order has no standing in the quoted 
markets until the specified price trigger is reached. The limit price 
on such an order is not required to be the same as the stop price. The 
resulting new limit order is subject to the current and proposed 
display requirement if routed to a DPM. Currently, these orders are not 
eligible for electronic routing and are generally handled by non-DPM 
agents.
    Not Held Orders (CBOE Rule 6.53(g))--A Not Held order is a 
discretionary order with instructions granting the agent flexibility as 
to the price and or time of execution. CBOE Rule 8.85(b)(vi) prohibits 
DPMs from representing discretionary orders, including Not Held orders.
    One-Cancels-the-Other Orders (``OCO'') (CBOE Rule 6.53(h))--An OCO 
order is comprised of two or more orders designated for treatment as a 
collective unit. The execution of any one of the component orders 
cancels the other(s). If the DPM cannot execute any of the orders upon 
receipt, then none can be displayed or booked as doing so could result 
in the approximate simultaneous execution of more than one component 
order, in direct contravention of the primary order condition. Such a 
result would place the agent and/or customer at undue risk. OCO orders 
are generally not handled by a DPM agent due to the specialized nature 
of the order handling required.
    All or None Orders (``AON'') (CBOE Rule 6.53(i))--While an AON can 
be a limit order, instructions require the order be executed in its 
entirety or not at all. The Commission's Limit Order Display Rule also 
provides an exception for AON orders.\6\
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    \6\ See 17 CFR 240.11Ac1-4(c)(7).
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    Fill or Kill Orders (``FOK'') (CBOE Rule 6.53(j))--While a FOK 
order can be a limit order, instructions require it be executed in its 
entirety immediately upon representation and, if not executed, the 
order is to be treated as cancelled. CBOE Rule 6.44.04 currently 
specifies that FOK bids or offers be treated as AONs and specifies that 
such bids and offers will not be disseminated by CBOE in its quotes.
    Immediate or Cancel Orders (``IOC'') (CBOE Rule 6.53(k))--An IOC 
order is a market or limit order which is to be executed in whole or in 
part as soon as such order is represented in the trading crowd. Any 
portion not executed is to be cancelled, which means it cannot be 
displayed. An IOC order, like an FOK order, shares most of the same 
characteristics of an AON order, which are exempt from the Commission's 
Limit Order Display Rule.\7\ Given the similarity between these order 
types, CBOE believes that IOC orders should also be exempt.
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    \7\ See 17 CFR 240.11Ac1-4(c)(7).
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    Complex Orders: Spread (CBOE Rule 6.53(d)) \8\, Combo (CBOE Rule 
6.53(e)), Straddle (CBOE Rule 6.53(f)), Stock-option (CBOE Rule 
1.1(ii))--These orders specify instructions to trade more than one 
options series or product as a package, typically at a specified net 
debit or credit, as opposed to a specific limit price for each leg 
involved. Therefore, there is no specified limit price for each series 
involved to display in the quotes. Moreover, the Options Price 
Reporting Authority (``OPRA'') does not accept complex order quotes at 
net prices. Each component of the complex order is, in essence, itself 
a contingency on the ability to execute the other components of the 
order. Since there is no guarantee that all components will become 
executable at the same time, if at all, forced dissemination could 
result in the execution of less than all components of the order. Such 
a ``legged'' execution would put the customer at undue risk. Further, 
the complicated nature of these

[[Page 40424]]

types of orders dictates they take longer to represent and negotiate.
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    \8\ This definition of spread order includes an inter-regulatory 
spread order, as defined in CBOE Rule (1.1(II)).
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    Orders Received During a Trading Rotation: Orders received before 
or during a trading rotation (as defined in CBOE Rules 6.2, 6.2A, and 
6.2B) would be exempt from the 30-second standard. During a rotation, 
CBOE systems attempt to find the opening price and until the opening 
price is established, there is no disseminated market. Once the trading 
rotation ends and regular trading begins, orders received before or 
during the trading rotation will be subject to the display 
requirement.\9\
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    \9\ CBOE Rule 6.53(1) provides that orders may be designated as 
Opening Rotation orders. An opening rotation order is a market order 
that requires execution in whole or in part only during the opening 
rotation. Orders received before or during an opening rotation must 
be designated as opening rotation orders, otherwise the unexecuted 
portion automatically will be treated as an unexecuted limit order 
and will be displayed after the rotation ends.
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    Large Sized Orders: The Commission's Limit Order Display Rule 
provides a general exclusion for block size orders of at least 10,000 
shares.\10\ CBOE proposes to adopt a similar exception for large sized 
orders. Accordingly, there will be no obligation to display orders for 
more than 100 contracts, unless the customer placing such order 
requests otherwise.
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    \10\ See 17 CFR 240.11Ac1-4(c)(4).
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    Finally, CBOE proposes to relocate the last paragraph of CBOE Rule 
8.85(b) to the introductory paragraph of CBOE Rule 8.85(b).\11\ Nothing 
in the rule text changes other than its location within the rule.
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    \11\ This paragraph states, ``To the extent that there is any 
inconsistency between the specific obligations of a DPM set forth in 
subparagraphs (b)(i) through (b)(vii) of this Rule and the general 
obligations of a Floor Broker or of an Order Book Official under the 
Rules, subparagraphs (b)(i) through (b)(vii) of this Rule shall 
govern.'' This paragraph actually appears in two locations in Rule 
8.85(b). The Exchange proposes to eliminate the second reference.
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2. Statutory Basis
    The Exchange believes the proposal 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.\12\ Specifically, CBOE believes the proposed rule 
change is consistent with the Section 6(b)(5) 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.\13\ 
Furthermore, CBOE believes that the proposed changes are consistent 
with the Act's requirement that an exchange's rules not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 will impose a 
burden on competition that is not necessary or appropriate in 
furtherance of 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-2004-35 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-2004-35. 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 
Exchange. 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-2004-35 and should be submitted on or before July 23, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15083 Filed 7-1-04; 8:45 am]
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