[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43028-43032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16324]



[[Page 43028]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50003; File No. SR-CBOE-2004-24]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change and Amendment No. 1 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 to the Proposed Rule Change Allowing a New Type of 
Designated Primary Market-Maker--e-DPMs

July 12, 2004.

I. Introduction

    On April 22, 2004, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), 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 amend its rules to allow 
remote competing Designated Primary Market-Makers (``DPMs''). On April 
30, 2004, the CBOE filed Amendment No. 1 to the proposed rule 
change.\3\ On May 7, 2004, the CBOE's rule proposal, as amended, was 
published for comment in the Federal Register.\4\ No comment letters 
were received on the proposal. On June 15, 2004, the CBOE filed 
Amendment No. 2 to the proposed rule change.\5\ The Commission is 
approving the proposed rule change and Amendment No. 1 thereto, and is 
publishing notice of and granting accelerated approval to Amendment No. 
2 to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superceded the CBOE's original 
19b-4 filing in its entirety.
    \4\ See Securities Exchange Act Release No. 49643 (April 30, 
2004), 69 FR 25647.
    \5\ See letter from Angelo Evangelou, Managing Senior Attorney, 
Legal Division, CBOE, to Deborah L. Flynn, Assistant Director, and 
Sapna Patel, Special Counsel, Division of Market Regulation 
(``Division''), Commission, dated June 14, 2004 (``Amendment No. 
2''). In Amendment No. 2, the CBOE proposes technical changes to the 
proposed rule text to indicate proposed new rule language and to 
clarify e-DPM obligations and performance review standards. In 
connection with the CBOE's proposal to reduce the ``counting 
period'' to one second, the CBOE proposes to modify CBOE Rule 
6.45A(d) to delete the requirement that when Market-Maker quotes 
interact with other Market-Maker quotes and result in quote locks 
that last one second or less, the Market-Markers locking the market 
are obligated to trade one contract in open outcry. The CBOE has, in 
conjunction with its proposed changes to CBOE Rule 6.45A(d), 
requested an exemption from Rule 11Ac1-1 under the Act (``Quote 
Rule'') for Market-Maker quote locks that do not exceed one second. 
See letter from Joanne Moffic-Silver, General Counsel and Corporate 
Secretary, CBOE, to Annette Nazareth, Director, Division, 
Commission, dated July 9, 2004 (``CBOE Exemption Request Letter''). 
Under separate cover, the Commission has granted Market-Makers an 
exemption pursuant to paragraph (e) of the Quote Rule from their 
obligations under paragraph (c)(2) of the Quote Rule with respect to 
interlocking Market-Maker quotations in Hybrid classes that last for 
no more than one second, provided that such Market-Makers' quotes 
are firm for all customer and broker-dealer orders, including orders 
for the accounts of other options market makers. See letter from 
David Shillman, Associate Director, Division, Commission, to Angelo 
Evangelou, Managing Senior Attorney, Legal Division, CBOE, dated 
July 12, 2004 (``SEC Exemption Letter'').
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II. Description of Proposal

    The CBOE's Hybrid Trading System is an electronic trading platform 
integrated with its floor-based open-outcry auction market.\6\ The CBOE 
proposes to enhance the Hybrid platform by adding a new category of 
CBOE market-making participant--electronic DPMs (``e-DPMs''). e-DPMs 
would be member organizations appointed to operate on the CBOE as 
competing DPMs/specialists in a broad number of option classes, and 
would therefore be permitted to share in the DPM participation right in 
their allocated option classes. e-DPMs would enter bids and offers 
electronically from locations other than the trading crowds where the 
applicable option classes are traded, and would not be required to have 
traders physically present in the trading crowd.
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    \6\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003).
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A. Appointment, Allocation, and Membership Requirements for e-DPMs

    Under the proposal, 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.\7\ The CBOE also proposes to require e-DPMs to accept 
allocations in a broad number of option classes. All classes allocated 
by the Exchange to an e-DPM would constitute the e-DPM's appointment.
    e-DPMs would be required to own or lease CBOE or Chicago Board of 
Trade (exercised) memberships to operate as e-DPMs on the Exchange. 
Each membership that an e-DPM owns would entitle the e-DPM to stream 
quotes into 30 allocated classes. Each membership that an e-DPM leases 
would entitle the e-DPM to stream quotes into 20 allocated classes. At 
the end of three years, the CBOE would require every e-DPM to own seats 
to satisfy this requirement and thereafter the e-DPM would no longer be 
allowed to use leased seats for this purpose.
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    \7\ The process and rules by which e-DPMs would be appointed was 
submitted to the Commission as a separate proposed rule change (File 
No. SR-CBOE-2004-17). The Commission approved the CBOE's appointment 
criteria for e-DPMs on April 19, 2004. See Securities Exchange Act 
Release 49577, 69 FR 22576 (April 26, 2004) (``e-DPM Appointment 
Criteria Approval Order'').
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B. e-DPM Obligations

    e-DPMs would have specific obligations governing all classes 
comprising their appointments. Specifically, proposed CBOE Rule 8.93(i) 
would require each e-DPM to provide continuous, two-sided quotations in 
at least 90% of the series of each allocated class with a minimum size 
of at least 10 contracts.\8\ In addition, the proposal would require 
all e-DPM quotations to be firm and to comply with the maximum bid-ask 
width requirements contained in CBOE Rule 8.7(b)(iv). Each e-DPM also 
would be required to 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. Each e-DPM would be required to notify the 
Exchange immediately of any material operational or financial changes 
to the e-DPM organization and to 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. Moreover, each e-DPM would be obligated to 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. Other proposed e-DPM obligations are set forth 
in proposed CBOE Rule 8.93.
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    \8\ If an electronic request-for-quote (``RFQ'') functionality 
is activated for Hybrid classes, e-DPMs would have additional or 
alternative obligations regarding RFQs, including the obligation to 
respond to at least 98% of RFQs in their appointed classes. The RFQ 
functionality currently exists for trading on CBOEdirect, the 
Exchange's purely screen-based trading platform.
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C. Affiliated Floor-Market Maker Pilot Program

    The CBOE also proposes, as a pilot program for an 18-month period 
commencing on Commission approval of this proposal, to allow an e-DPM 
to choose to have a separate affiliated Market-Maker physically present 
in trading crowds where it operates as an e-DPM, provided that such 
Market-Maker trades on a separate

[[Page 43029]]

membership.\9\ The CBOE represents that this affiliated Market-Maker 
would be allowed all the privileges of any other Market-Maker and would 
have all of the responsibilities of any other Market-Maker.
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    \9\ As part of the pilot program, the CBOE states that it would 
confidentially provide the Commission with data on: (1) The size of 
orders that e-DPMs and affiliated 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 
affiliate are quoting; and (4) a breakdown of how orders are 
allocated to the e-DPM, the affiliated Market-Maker, and any other 
participants.
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D. Participation Entitlement

    The CBOE proposes to modify certain aspects of the DPM 
participation entitlement--rights granted to a DPM when the DPM is 
quoting on the prevailing bid or offer--to accommodate the e-DPM 
program. The CBOE's current DPM participation rights are 30%, 40%, or 
50%.\10\ Under this proposal, the CBOE proposes that DPMs and e-DPMs 
(the ``DPM Complex'') would 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.
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    \10\ 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%. See CBOE 
Regulatory Circular RG00-193.
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    The CBOE proposes that the DPM participation entitlement to the DPM 
Complex would be allocated in the following manner: If the DPM and one 
or more e-DPMs were quoting at the best bid/offer on the CBOE, the e-
DPM participation entitlement would be one-half (50%) of the total DPM 
Complex entitlement and would be divided equally by the number of e-
DPMs quoting at the best bid/offer on the CBOE, while the DPM would 
retain the other half of the entitlement. If the DPM were not quoting 
at the best bid/offer on the Exchange and one or more e-DPMs were 
quoting at the best bid/offer on the Exchange, then the e-DPM(s) would 
be allocated the entire participation entitlement, which would be 
divided up equally between them. If, however, only the DPM and/or e-
DPM(s) were quoting at the best bid/offer on the CBOE and there were no 
Market-Makers quoting with them, there would be no DPM/e-DPM 
participation entitlement and instead the allocation procedures under 
CBOE Rule 6.45A would apply. Pursuant to proposed 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 
the CBOE's Ultimate Matching Algorithm (``UMA''), and an e-DPM would 
never receive an allocation greater than the size of its quote.

E. Proposed Extra ``A'' Component in UMA for DPMs

    In addition, the CBOE proposes to allow a DPM that uses more than 
one membership in any given trading crowd to increase its ability to 
participate via UMA by increasing the DPM's ``A'' component in the UMA 
calculation by one.\11\ The CBOE represents that on many exchanges the 
specialist receives a 40% guarantee when there are at least three other 
market makers quoting the best price. On the CBOE, the DPM is entitled 
to only 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), the CBOE represents that it would not allow the 
incremental amount a DPM receives because of the proposed second ``A'' 
component to cause the DPM to exceed a 40% ``guarantee'' threshold.
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    \11\ The ``A'' component of UMA represents 1 over the total 
number of market participants on the market. UMA currently gives 
equal weighting to the ``A'' and ``B'' components. When the DPM is 
given credit for the additional memberships, both the numerator and 
the denominator would be increased by no more than 1 (e.g., \1/4\ 
would become \2/5\).
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F. Performance and Operations Review for e-DPMs

    Reviews of e-DPM performance would be conducted under proposed new 
CBOE Rule 8.94(a). Furthermore, proposed CBOE Rule 8.94(b) would 
provide that the Exchange may, pursuant to a proposed rule change filed 
with the Commission under Section 19(b) of the Act, adopt rules 
detailing objective criteria upon which e-DPMs' fee rates shall be 
reviewed. Such objective criteria, if approved by the Commission, may 
include average quote size, average quote width, the percentage of time 
an e-DPM is quoting at the National Best Bid or Offer, and other 
objective performance related measurements. The proposed rule further 
states that 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. Proposed CBOE Rule 8.94(c) 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 were terminated, conditioned, or otherwise limited by 
the Exchange pursuant to this Rule, the member organization would be 
permitted to seek review of that decision under Chapter XIX of the CBOE 
Rules.

G. Limitations on Access Due to Systems Constraints

    The CBOE is also proposing new CBOE Rule 6.23A, which provides that 
the Exchange may limit the number of messages sent by members accessing 
the Exchange electronically to ensure proper performance of the system, 
to protect the integrity of the Hybrid Trading System. However, 
proposed CBOE Rule 6.23A explicitly states that any such restrictions 
must be objectively determined and submitted to the Commission for 
approval pursuant to a proposed rule change under Section 19 of the 
Act.\12\
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    \12\ 15 U.S.C. 78s.
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III. Description of Amendment No. 2 to the Proposed Rule Change

    In Amendment No. 2 to the proposed rule change, the CBOE proposes 
changes to CBOE Rule 6.45A(d) to delete the requirement that when 
Market-Maker quotes interact with other Market-Maker quotes and result 
in quote locks that last one second or less, the Market-Markers locking 
the market are obligated to trade one contract in open outcry.\13\ In 
addition, the CBOE proposes to limit the ``counting period'' 
established by the rule to one second, during which time such Market-
Makers would be obligated to execute customer and broker-dealer orders 
eligible for automatic execution. Quote locks that last more than one 
second would execute against each other for the full size.
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    \13\ The CBOE has, in conjunction with its proposed changes to 
Rule 6.45A(d), requested an exemption from the Quote Rule for 
Market-Maker quote locks that do not exceed one second. See CBOE 
Exemption Request Letter, supra note 5.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning whether the Amendment No. 2 to the proposed rule 
change 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

[[Page 43030]]

     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 August 9, 2004.

V. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange \14\ and, in particular, the requirements of 
Section 6 of the Act.\15\ Specifically, the Commission finds that the 
proposal to add a new category of CBOE market making participant, e-
DPMs, to the CBOE's Hybrid platform is consistent with Section 6(b)(5) 
of the Act,\16\ in that the proposal has been designed to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.
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    \14\ The Commission has considered the amended proposed rule 
change's impact on efficiency, competition and capital formation. 15 
U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that e-DPMs would essentially operate as 
remote, electronic competing specialists on the CBOE. As such, e-DPMs 
would have additional responsibilities and obligations compared to 
other CBOE Market-Makers, including an obligation to participate as an 
e-DPM in a broad number of option classes and an enhanced continuous 
quoting requirement for the quotes that they stream to the Exchange 
from locations outside of the trading crowd. In return for undertaking 
these additional responsibilities, e-DPMs would receive the benefit of 
sharing in the DPM's participation entitlement in their appointed 
option classes. The Commission further notes that the CBOE has proposed 
special rules and requirements to accommodate the introduction of e-
DPMs on the Exchange, including rules on the allocation of option 
classes based on memberships, heightened obligations in connection with 
their allocated option classes, and specific operations and performance 
review criteria. The Commission believes that these proposed new rules 
for e-DPMs should place affirmative obligations on e-DPMs. The 
Commission therefore finds that, for the reasons discussed more fully 
below, the CBOE's proposal to allow e-DPMs to operate as competing 
specialists on its Hybrid system is consistent with the Act.

A. Appointment, Allocation, and Membership Requirements for e-DPMs

    The Commission notes that e-DPMs may not quote in option classes 
other than their appointed/allocated classes. Moreover, although there 
could be more than one e-DPM in a particular option class (from 
separate member organizations), the Commission notes that an e-DPM may 
not be allocated an option class in which its member organization 
serves as a DPM. The Commission believes that these limitations should 
help to reduce the opportunity for conflicts of interest detrimental to 
the interests of investors.

B. e-DPM Obligations

    The Commission further notes that proposed CBOE Rule 8.93 provides 
a list of obligations that an e-DPM would be required to fulfill in 
addition to (or, in certain cases, in lieu of) those of a CBOE Market-
Maker or DPM. One particular obligation would require e-DPMs to provide 
two-sided quotations in at least 90% of the series of each of its 
allocated option classes, or if the RFQ functionality is utilized by 
the Exchange, to respond to 98% of the RFQs. Another proposed 
obligation would require e-DPMs to ``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.'' The Commission emphasizes 
that the CBOE should not interpret this proposed obligation to in any 
way directly or indirectly attempt to restrict a market participant 
that is appointed as an e-DPM on the CBOE from performing market-making 
or specialist activities on other markets.
    The Commission notes that e-DPMs, in addition to complying with the 
requirements of CBOE Rule 4.18, also would be obligated to 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. The Commission believes that the requirement 
that there be an information barrier between an e-DPM and its 
affiliates with respect to transactions in its allocated option classes 
and the related underlying securities should serve to reduce the 
opportunity for unfair trading advantages or misuse of material, non-
public information.

C. Affiliated Floor Market-Maker Pilot Program

    The Commission is permitting the CBOE, for an 18-month pilot period 
commencing on Commission approval of this proposal, to allow an e-DPM 
to choose to have an affiliated Market-Maker, trading on a separate 
membership, physically present in trading crowds where it operates as 
an e-DPM. The CBOE has committed to, during this pilot period, provide 
to the Commission data relating to: (1) The size of orders that e-DPMs 
and affiliated 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 affiliate are quoting; 
and (4) a breakdown of how orders are allocated to the e-DPM, the 
affiliated Market-Maker, and any other participants. The Commission 
expects to use this data to determine if the practice of allowing a 
member organization to receive more of an allocation of orders based 
simply on the number of Market-Makers that it has

[[Page 43031]]

quoting in an option class is unfairly discriminatory in any way to 
other quoting market participants, and to determine whether to extend 
or permanently approve this practice.

D. Participation Entitlement

    The Commission notes that the CBOE proposes to allow e-DPMs to 
share in the DPM's participation entitlement. If the DPM and one or 
more e-DPMs were quoting at the best bid/offer on the CBOE in a 
particular option class, the e-DPM(s) would be entitled to share 50% of 
the DPM's participation entitlement, which would then be divided 
equally by the number of e-DPMs quoting at the best bid/offer on the 
CBOE.\17\ e-DPMs would receive allocations based only on the greater of 
the participation entitlement or what the e-DPM would otherwise receive 
through UMA, but in no event greater than the size of its quote. The 
Commission notes, however, that if only the DPM and/or e-DPM(s) were 
quoting at the best bid/offer on the CBOE with no other Market-Makers 
quoting with them, there would be no participation entitlement and 
instead the allocation procedures under CBOE Rule 6.45A would apply. 
The Commission believes that because e-DPMs have certain obligations 
greater than those of other Market-Makers on the CBOE, it would not be 
inappropriate for e-DPMs that are quoting at the CBOE's best bid/offer 
with the DPM to be permitted to receive a portion of the DPM's 
participation entitlement.
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    \17\ The Commission notes that proposed CBOE Rule 
8.87(b)(1)(iii) provides that 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.
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E. Proposed Extra ``A'' Component in UMA for DPMs

    Furthermore, the Commission notes that the CBOE proposes to allow 
DPMs that use more than one membership in any given trading crowd to 
increase their ability to participate via UMA by increasing the DPM's 
``A'' component in the UMA calculation by one. The CBOE represents that 
this extra ``A'' component would not have an impact on the DPM's 
participation guarantee, and 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. While the CBOE represents 
that the reason DPMs should receive an extra ``A'' component is because 
they would receive less of a participation guarantee with the 
introduction of e-DPMs on the Exchange and would continue to need 
multiple memberships to effectively operate as a DPM in the trading 
crowd, the Commission notes that the number of memberships needed to 
operate as a DPM is not a factor that it is considering in determining 
whether allowing DPMs an extra ``A'' component is consistent with the 
Act.

F. Performance and Operations Reviews for e-DPMs

    The Commission notes that the CBOE has proposed performance review 
standards pursuant to proposed CBOE Rule 8.94(a), which would take into 
account how well an e-DPM has fulfilled its obligations under proposed 
CBOE Rule 8.93. Furthermore, the Commission notes that proposed CBOE 
Rule 8.94(b) provides that the CBOE may adopt rules in the future, 
subject to Commission approval, with detailed objective criteria upon 
which e-DPMs' fee rates could be reviewed. Moreover, the Commission 
believes that proposed CBOE Rule 8.94(c) should provide guidance 
regarding the termination or limitation of a member organization's 
approval to act as an e-DPM, and the ability of the member organization 
to appeal such decision.

G. Limitations on Access Due to Systems Constraints

    In addition, the Commission notes that proposed new CBOE Rule 
6.23A, which would allow the Exchange to limit the number of messages 
sent by members accessing the Exchange to protect the Hybrid Trading 
System, grants the Exchange no authority at this time and therefore, 
would not permit the CBOE to place any limitations on its members under 
this rule unless such limitations were objectively determined and 
submitted as a proposed rule change to the Commission for approval 
pursuant to Section 19(b) of the Act.\18\
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    \18\ 15 U.S.C. 78s(b).
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H. Quote Locks

    In Amendment No. 2, the CBOE proposes changes to CBOE Rule 6.45A(d) 
to delete the requirement that when Market-Maker quotes interact with 
other Market-Maker quotes and result in quote locks that last one 
second or less, the Market-Markers locking the market are obligated to 
trade one contract in open outcry. In addition, the CBOE proposes 
limiting the ``counting period'' to one second during which time 
Market-Makers whose quotes are locked may eliminate the locked market. 
Quote locks that last more than one second would result in the quotes 
executing against each other for the full size. The CBOE represents 
that quote locks that occur between Market-Makers are mainly due to 
technological disparities. The CBOE has therefore, in conjunction with 
its proposed changes to CBOE Rule 6.45A(d), requested an exemption from 
the Quote Rule for Market-Maker quote locks that do not exceed one 
second.\19\ The Commission has granted the CBOE an exemption from the 
Quote Rule solely under this limited circumstance, provided that 
Market-Makers' quotes are firm for all customer and broker-dealer 
orders, including orders for the accounts of other options market 
makers.\20\ The Commission believes a requirement that an e-DPM trade 
one contract in open outcry if it locks the quote of another Market-
Maker would be impractical in an environment in which market-making 
participants can stream quotes electronically from locations outside of 
the trading crowd in their allocated option classes without physically 
being present on the trading floor, especially if such a quote lock 
occurs due to technological differences.
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    \19\ See CBOE Exemption Request Letter, supra note 5.
    \20\ See SEC Exemption Letter, supra note 5.
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VI. Accelerated Approval of Amendment No. 2 to the Proposed Rule Change

    Finally, the Commission finds good cause for approving Amendment 
No. 2 to the proposed rule change prior to the thirtieth day after the 
amendment is published for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\21\ In Amendment No. 2, the CBOE proposes 
technical changes to the proposed rule text to indicate proposed new 
rule language and to clarify e-DPM obligations and performance review 
standards. Furthermore, the CBOE proposes amendments to CBOE Rule 
6.45A(d) to reduce the ``counting period'' to one second and to delete 
the requirement that when Market-Maker quotes interact with other 
Market-Maker quotes and result in quote locks that last one second or 
less, the Market-Markers locking the market are obligated to trade one 
contract in open outcry. The Commission believes that the proposed 
changes in Amendment No. 2 are necessary to the efficient and orderly 
introduction of remote e-DPMs and to the proper operation of the CBOE's 
Hybrid Trading System and, therefore, believes that accelerated 
approval of Amendment No. 2 is appropriate.
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    \21\ 15 U.S.C. 78s(b)(2).

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[[Page 43032]]

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (File No. SR-CBOE-2004-24) and 
Amendment No. 1 are hereby approved, and that Amendment No. 2 is 
approved on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\23\

    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16324 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P