[Federal Register Volume 69, Number 158 (Tuesday, August 17, 2004)]
[Notices]
[Pages 51133-51134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18758]



[[Page 51133]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50169; File No. SR-CBOE-2004-02]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Granting Approval to Proposed Rule Change and Amendment No. 
1 Thereto, and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 2 Thereto To Amend the Obvious Error Rule Relating to 
Options Quoted ``No-Bid''

August 9, 2004.
    On January 8, 2004, the Chicago Board Options Exchange, Inc. 
(``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 obvious error rule, 
CBOE Rule 6.25. On February 2, 2004, 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 March 31, 2004.\4\ The 
Commission received no comments on the proposal. On June 10, 2004, CBOE 
filed Amendment No. 2 to the proposed rule change.\5\ This order 
approves CBOE's proposed rule change, as amended, publishes notice of 
Amendment No. 2 to the proposed rule change, and grants accelerated 
approval to Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Steve Youhn, Legal Division, CBOE, to Nancy 
J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated January 30, 2004 (``Amendment No. 
1''). Amendment No. 1 replaced and superseded the original filing in 
its entirety.
    \4\ See Securities Exchange Act Release No. 49462 (March 23, 
2004), 69 FR 16998.
    \5\ See Letter from Steve Youhn, Legal Division, CBOE, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated June 9, 
2004 (``Amendment No. 2''). Amendment No. 2 replaced and superseded 
the original proposal, as amended, in its entirety. In Amendment No. 
2, the Exchange amended the proposed rule text to provide that 
buyers of options series quoted ``no-bid'' at a nickel (i.e., $0.05 
offer) may request that their execution be nullified provided that 
at least one strike price below (for calls) or above (for puts) in 
the same options class was quoted no bid at a nickel at the time of 
execution.
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I. Description of the Proposal

    The Exchange proposes to amend CBOE Rule 6.25 (Nullification and 
Adjustment of Electronic Transactions), which establishes six specific 
objective guidelines that may be used as the basis for adjusting or 
nullifying a transaction. The Exchange proposes to adopt one additional 
guideline, relating to options quoted ``no-bid,'' \6\ which may be used 
as a basis for nullifying trades. Under this guideline, buyers of 
options series quoted no-bid at a nickel (i.e., $0.05 offer) may 
request that their execution be nullified provided at least one strike 
price below (for calls) or above (for puts) in the same options class 
was quoted no-bid at a nickel at the time of execution.
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    \6\ ``No-bid'' is synonymous with ``zero-bid.''
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    According to CBOE, series of options quoted no-bid at a nickel are 
usually deep out-of-the-money series that have little, if any, chance 
of expiring in-the-money. CBOE asserts that for this reason, relatively 
few transactions occur in these series, and those that do are usually 
the result of error. As an example, CBOE notes that during expiration 
week with the underlying stock trading at $21, the DEC 40 calls likely 
will be quoted no-bid at a nickel. If the DEC 30s, 35s, and 40s are 
trading no-bid at a nickel, and a buyer inadvertently purchases the DEC 
40 series calls at a nickel, then this transaction would qualify for 
nullification under the proposed rule, as there is at least one series 
below the 40s (i.e., the 35s) also quoted no-bid at a nickel.
    The Exchange believes that this type of transaction should qualify 
as an obvious error by virtue of the fact that strikes below (for 
calls) or above (for puts) are quoted no-bid at a nickel. According to 
CBOE, there is no legitimate reason why a buyer of calls would pay a 
nickel for the DEC 40s when the DEC 35s, which are not as far out-of-
the-money, trade at the same price.
    The Exchange also proposes to restrict applicability of the ``no-
bid at a nickel rule'' to electronic transactions only by amending the 
introductory text to CBOE Rule 6.25. Trades occurring in open outcry 
would not qualify for nullification under this proposal.
    CBOE represents that this proposed rule is substantially similar to 
PCX Rule 6.87(g)(2)(F) and ISE Rule 720.05, with minor differences. The 
CBOE proposal differs slightly from the PCX rule in that CBOE requires 
the series in question to be offered at $0.05, while the PCX does 
not.\7\ The CBOE proposal differs slightly from the ISE proposal in 
that the ISE rule requires at least three strikes below (calls) or 
above (puts) in the same class be zero bid at a nickel. CBOE, like the 
PCX, proposes to only require one series above or below be quoted no-
bid at a nickel.
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    \7\ For example, on PCX a series may be ``no-bid,'' offered at 
$0.20. The ISE also requires an $0.05 offer.
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II. Discussion

    The Commission has reviewed carefully the proposed rule change and 
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.\8\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\9\ which requires that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts and practices, 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, in general, to protect investors and the public interest.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
price of the executed trade indicates an ``obvious error'' may exist, 
suggesting that it is unrealistic to expect that the parties to the 
trade had come to a meeting of the minds regarding the terms of the 
transaction. In the Commission's view, the determination of whether an 
``obvious error'' has occurred, and the nullification of a transaction 
because an obvious error is considered to exist, should be based on 
specific and objective criteria and subject to specific and objective 
procedures. The Commission believes that CBOE's proposed amendment to 
its obvious error rule establishes specific and objective criteria for 
determining when a trade is an obvious error for options quoted no-bid 
at a nickel in electronic transactions. Moreover, the proposal clearly 
specifies that such trades may be nullified pursuant to the Exchange's 
existing procedures governing the review of obvious error transactions. 
Finally, the Commission notes that the Exchange's proposed amendment to 
its obvious error rule for options quoted no-bid at a nickel is similar 
to the rules of other exchanges that the Commission has previously 
approved.\10\
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    \10\ See Securities Exchange Act Release Nos. 48097 (June 26, 
2003), 68 FR 39604 (July 2, 2003) (approving File No. SR-ISE-2003-
10); and 48538 (September 25, 2003), 68 FR 56858 (October 2, 2003) 
(approving File No. SR-PCX-2002-01).

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[[Page 51134]]

    Pursuant to Section 19(b)(2) of the Act,\11\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
30th day after the date of publication of notice of the filing thereof, 
unless the Commission finds good cause for so doing and publishes its 
reasons for so finding. The Commission hereby finds good cause for 
approving Amendment No. 2 to the proposal prior to the 30th day after 
publishing notice of Amendment No. 2 in the Federal Register. The 
revisions made to the proposal in CBOE's Amendment No. 2, which sets 
forth specific and objective criteria for determining whether an 
electronic transaction in an option quoted no-bid at a nickel is an 
obvious error, are based on rules of other exchanges that the 
Commission previously has approved.\12\ Thus, the Commission believes 
that no new issues are raised by the proposal. Accordingly, pursuant to 
Section 19(b)(2) of the Act,\13\ the Commission finds good cause to 
approve Amendment No. 2 prior to the thirtieth day after notice of the 
Amendment is published in the Federal Register.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ See supra note 10.
    \13\ 15 U.S.C. 78s(b)(2).
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III. Solicitation of Comments

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

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-2004-02. 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 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-2004-02 
and should be submitted on or before September 7, 2004.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-CBOE-2004-02), as 
amended, be, and hereby is, approved, and that Amendment No. 2 to the 
proposed rule change be, and hereby is, approved on an accelerated 
basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18758 Filed 8-16-04; 8:45 am]
BILLING CODE 8010-01-P