[Federal Register Volume 69, Number 210 (Monday, November 1, 2004)]
[Notices]
[Pages 63418-63419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50583; File No. SR-CBOE-2004-64]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Allocation of N-Second Group Trades Pursuant to Rule 6.45A(c)

October 22, 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 October 14, 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 the 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

    The CBOE proposes to eliminate the Designated Primary Market-Maker 
(``DPM'') participation entitlement for trades occurring pursuant to 
CBOE Rule 6.45A(c). Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
brackets.
* * * * *

Rule 6.45A Priority and Allocation of Trades for CBOE Hybrid System

* * * * *
    (a)-(b) No change.
    (c) Interaction of Market Participant's Quotes and/or Orders with 
Orders in Electronic Book.
* * * * *
    (i)-(ii) No change.
    (iii) DPM Participation Entitlement: [If a DPM is eligible for an 
allocation pursuant to the operation of this paragraph (c) by virtue of 
being a member of the ``N-second group'' as described in paragraph 
(c)(ii), the DPM shall be entitled to receive an allocation equal to 
the amount it would be entitled to pursuant to the DPM participation 
right established pursuant to Rule 8.87 (and Regulatory Circulars 
issued thereunder). The DPM's entitlement percentage is expressed as a 
percentage of the remaining quantity after all public customer orders 
in the electronic book have been executed.] There is no DPM 
participation entitlement applicable to orders allocated pursuant to 
paragraph (c).
    [(iv) Temporary Order Access Terminals: The Exchange will provide 
Temporary Order Access Terminals (``T-OATs'') in each trading crowd in 
which Hybrid is operational. Each T-OAT, which will be reserved for the 
exclusive use of floor brokers, will allow the entry by floor brokers 
of agency orders that will be eligible to participate in the ``N-second 
group.'' Each T-OAT will be conveniently located and will be easily 
accessible. The Exchange will provide in each crowd at least one T-OAT, 
and where necessary, as many T-OATs as are necessary to accommodate 
demand in that trading pit. The Exchange will continue to provide T-
OATs until either November 28, 2003 or until the Hybrid system is 
capable of accepting orders from floor broker workstations that will be 
eligible to participate in the ``N-second group,'' whichever occurs 
first.]
    (d)-(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, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange 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 6.45A(c) governs the allocation of orders resting in the 
Exchange's electronic book (``book'' or ``Ebook'') among market 
participants. Generally, if only one market participant interacts with 
the order in the book, he/she will be entitled to full priority. If, 
however, more than one market participant attempts to interact with the 
same order in the book, a ``quote trigger'' process initiates. Under 
the quote trigger process, the first market participant to interact 
with the book order starts a counting period lasting N-seconds whereby 
each market participant that submits an order within that ``N-second 
period'' becomes part of the ``N-second group'' and is entitled to 
share in the allocation of that order via the formula contained in the 
rule. The Exchange does not propose to change the operation of the 
quote trigger process other than to eliminate the DPM participation 
right for ``N-second group'' trades.
    Currently, if a DPM is a member of the ``N-second group,'' he/she 
receives the standard participation entitlement.\3\ The Exchange 
proposes to eliminate the participation entitlement to DPMs involved in 
the quote trigger process. Instead, DPMs will be treated as any other 
market participant and will take in accordance with the formula 
contained in the rule. The Exchange believes eliminating the DPM 
participation entitlement will incent other market participants to 
quote competitively by giving them a greater percentage of resting 
orders in the book. Generally, the DPM participation entitlement is at 
least 30% (up to the size of the DPM's quote). In crowds where there 
are several members in the ``N-second group,'' this 30% may represent a 
relatively substantial portion of the book order. By treating the DPM 
as any other market participant, all market participants will be on 
equal footing. Accordingly, there should be a larger percentage of 
booked orders available for allocation to other non-DPM crowd members.
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    \3\ CBOE Rule 8.87 governs the operation of the DPM 
participation entitlement. The Exchange proposes no changes to the 
participation entitlement process or percentages.
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    While the Exchange is in the process of amending CBOE Rule 
6.45A(c), it takes this opportunity to eliminate paragraph (c)(iv) from 
the Rule. Under this paragraph, the Exchange was

[[Page 63419]]

obligated to provide Temporary Order Access Terminals in all Hybrid 
trading crowds until no later than November 28, 2003. As this date has 
come and gone, the Exchange proposes to eliminate this expired 
provision from the rule.
2. Statutory Basis
    The Exchange believes this amendment to the quote trigger process 
will provide market participants with an enhanced incentive to quote 
competitively, which should enhance competition and provide investors 
with deeper and more liquid markets. For these reasons, the Exchange 
believes the proposed rule change 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.\4\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \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.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition 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

    The Exchange neither received nor solicited written comments on the 
proposal.

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 CBOE 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 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-2004-64 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-2004-64. 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 
publicly available. All submissions should refer to File Number SR-
CBOE-2004-64 and should be submitted on or before November 22, 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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E4-2921 Filed 10-29-04; 8:45 am]
BILLING CODE 8010-01-P