[Federal Register Volume 69, Number 203 (Thursday, October 21, 2004)]
[Notices]
[Pages 61879-61881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2736]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50542; File No. SR-CBOE-2004-50]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. To Amend Its Rules Regarding Limitations on Designated 
Primary Market-Makers Putting Into Effect Stop and Stop-Limit Orders

October 14, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 29, 2004, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I, II, 
and III below, which items have been prepared by CBOE. CBOE amended the 
proposal on October 8, 2004.\3\ The Commission is publishing

[[Page 61880]]

this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Angelo Evangelou, Managing Senior Attorney, 
Legal Division, CBOE, to John Roeser, Senior Special Counsel, 
Division of Market Regulation, Commission, dated October 6, 2004 
(``Amendment No. 1''). In Amendment No. 1, CBOE amended the text of 
CBOE Rule 8.85(a)(viii) to clarify its proposed scope and 
application. Amendment No. 1 is incorporated in this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rules regarding limitations on 
Designated Primary Market-Makers (``DPMs'') putting into effect stop 
and stop-limit orders. New text is in italics.
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *
8.85 DPM Obligations
    (a) Dealer Transactions. Each DPM shall fulfill all of the 
obligations of a Market-Maker under the Rules, and shall satisfy each 
of the following requirements 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 
(a)(i) through (a)(x) of this Rule and the general obligations of a 
Market Maker under the Rules, subparagraphs (a)(i) through (a)(x) of 
this Rule shall govern. Each DPM shall:
    (i)-(vii) No change.
    (viii) Not initiate a transaction for the DPM's own account that 
would result in putting into effect any stop or stop limit order which 
may be in the book or which the DPM represents as Floor Broker except 
with the approval of a Floor Official and when the DPM guarantees that 
the stop or stop limit order will be executed at the same price as the 
electing transaction. The restrictions set forth in this paragraph do 
not apply to stop or stop limit orders received through the Hybrid 
System unless the terms of such orders are visible to the DPM, or 
unless such orders are handled by the DPM;
    (ix)-(xi) No change.
    (b)-(e) No change.
    * * * Interpretations and Policies:
    .01-.04 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
    CBOE Rule 6.53 defines a stop order as a contingency order to buy 
(sell) that becomes a market order to buy (sell) when the option 
contract trades or is bid (offered) at or above (below) the stop price 
on CBOE. The sender of the stop order determines the stop price. 
Similarly, a stop-limit order becomes a limit order when the stop price 
is triggered.
    CBOE Rule 8.85(a)(viii) currently prohibits DPMs from initiating a 
transaction for the DPM's own account that would result in putting into 
effect any stop or stop-limit order which may be in the book or which 
the DPM represents as Floor Broker except with the approval of a Floor 
Official and when the DPM guarantees that the stop or stop-limit will 
be executed at the same price as the electing transaction.
    Currently, stop and stop-limit orders route to PAR terminals in the 
trading station for representation by the DPM as Floor Broker. This is 
the case for classes on CBOE's Hybrid trading system and for classes 
that are not on Hybrid. Thus, DPMs need to monitor for quotes and/or 
trades at the stop price to ensure that stop orders are properly 
elected when the stop price is triggered.
    CBOE proposes to automate the handling of stop and stop-limit 
orders as an enhancement to CBOE's Hybrid trading system. According to 
CBOE, this will involve routing any electronic (non-paper) stop order 
to the Hybrid system (not to a PAR terminal) which will, in turn, elect 
the stop or stop-limit order when the stop price is triggered and 
automatically convert the order to a market order or limit order, as 
applicable. CBOE states that the purpose of this filing is to provide 
that the stop and stop-limit order DPM restrictions in CBOE Rule 
8.85(a)(viii) should not apply to orders in classes that are on the 
Hybrid system that are routed to CBOE electronically, and not visible 
to or handled by the DPM.
    CBOE, in general, believes that the restrictions in CBOE Rule 
8.85(a)(viii) are overly cumbersome and unnecessary. CBOE believes that 
the proposed Hybrid stop and stop-limit order handling enhancement will 
obviate the need for the restrictions in Hybrid classes. The stop and 
stop-limit orders will reside on the Hybrid system invisibly so that no 
DPM would know that it is triggering a stop or stop-limit order when 
with a trade or quote. Since according to the CBOE, the handling of the 
stop and stop-limit orders will be entirely automated, the DPM will no 
longer handle the stop order at any point or have any influence to 
purposefully affect triggering the stop or the ultimate execution price 
of the order.
2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with 
section 6(b) of the Act,\4\ in general, and furthers the objectives of 
section 6(b)(5) of the Act,\5\ in particular, in that it is designed to 
promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system, and to protect investors and the public 
interest.
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    \4\ 15 U.S.C. 78(b).
    \5\ 15 U.S.C. 78(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 any 
burden on competition that is not necessary or appropriate in 
furtherance of the 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,

[[Page 61881]]

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-2004-50 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-2004-50. 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 Room. 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-2004-50 and should be 
submitted on or before November 12, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2736 Filed 10-20-04; 8:45 am]
BILLING CODE 8010-01-P