[Federal Register Volume 69, Number 222 (Thursday, November 18, 2004)]
[Notices]
[Pages 67614-67615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3247]



[[Page 67614]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50655; File No. SR-CBOE-2004-04]


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 Guaranteed Participation Rule Relating to 
Facilitation and Crossing Transactions

November 10, 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 January 16, 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 Exchange. On 
November 3, 2004, CBOE submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Stephen Youhn, Legal Division, CBOE, to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated November 2, 2004 (``Amendment No. 
1''). Amendment No. 1 replaced and superseded the original filing in 
its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its guaranteed participation rule relating 
to facilitation and crossing transactions. The text of the proposed 
rule change is set forth below. Additions are italicized. Deletions are 
bracketed.
* * * * *

Rule 6.74. ``Crossing'' Orders

    (a)-(c) No change.
    (d) * * *
    (i) No change.
    (ii) [The percentage of the order which a Floor Broker is entitled 
to cross, a]After all public customer orders that were (1) on the limit 
order book and then (2) represented in the trading crowd at the time 
the market was established have been satisfied, [is determined as 
follows:] the Floor Broker will be entitled to cross 40% of the 
remaining contracts, provided the order trades at or between the best 
bid or offer given by the crowd in response to the broker's initial 
request for a market.
    [(A) 20% of the remaining contracts in the order if the order is 
traded at the best bid or offer given by the crowd in response to the 
broker's initial request for a market; or
    (B) 40% of the remaining contracts in the order if the order is 
traded between the best bid or offer given by the crowd in response to 
the broker's initial request for a market.]
    (iii)-(iv) No change.
    (v) If a trade pursuant to this paragraph (d) occurs at the DPM's 
principal bid or offer in its appointed class, then the DPM's 
guaranteed participation level which is established pursuant to 
Exchange Rule 8.87 [(or Exchange circulars issued pursuant to Exchange 
Rule 8.87)] shall apply only to the number of contracts remaining after 
the following orders have been satisfied: those public customer orders 
which trade ahead of the cross transaction as indicated in sub-
paragraph (d)(ii) above, and any portion of a customer order being 
crossed against the original order or the firm facilitation order as 
described in sub-paragraph (d)(ii) being represented by the Floor 
Broker. [The DPM's guaranteed participation may only be 25% for orders 
crossed pursuant to this paragraph unless the Floor Broker has chosen 
to cross less than its 20% entitlement, in which case the DPM's 
guaranteed entitlement] DPMs are not entitled to any guaranteed 
participation for trades occurring pursuant to this paragraph (d) 
unless the Floor Broker crosses less than its guaranteed 40%, in which 
case the DPM's guarantee will be a percentage that when combined with 
the percentage the firm crossed, [is no more than] does not exceed 40% 
of the order. If the trade occurs at a price other than the DPM's 
principal bid or offer, the DPM is entitled to no guaranteed 
participation.
    (vi)-(vii) No change.
    (e) No change.

Interpretations and Policies * * *

    .01-.08 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 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 parts 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 6.74, Crossing Orders, provides the procedures for 
crossing and facilitation orders. Paragraph (d) of that rule details 
the procedures for the Exchange's ``guaranteed'' crossing rule. In 
short, paragraph (d) enables a floor broker to cross 20% of an order if 
it matches the crowd's price or 40% of an order if it improves upon the 
crowd's price (``20/40% rule''). Recently, the Exchange has begun to 
lose orders to another Exchange that is more crossing and facilitation 
friendly to order flow providers. To remain competitive, CBOE proposes 
to amend its 20/40% rule to make it a straight 40% rule, as described 
below.
    Under the proposal, floor brokers would be entitled to cross 40% of 
an order, provided it trades at a price that matches or improves upon 
the price given by the trading crowd in response to the broker's 
initial request for a market. All other requirements would remain the 
same (e.g., customer priority, minimum order size, etc.). To effect 
this change, CBOE proposes to amend CBOE Rule 6.74(d)(ii) by removing 
subparagraphs (A) and (B) and replacing them with a new paragraph 
(D)(ii) that states: ``After all public customer orders that were (1) 
on the limit order book and then (2) represented in the trading crowd 
at the time the market was established have been satisfied, the floor 
broker will be entitled to cross 40% of the remaining contracts, 
provided the order trades at or between the best bid or offer given by 
the crowd in response to the broker's initial request for a market.'' 
The procedure for facilitating orders would remain the same. The only 
change would be to the size of the firm's guaranteed entitlement, which 
would go from 20% to 40%.
    Changing to a straight 40% rule would require corresponding changes 
to the DPM participation entitlement as it pertains to facilitation and 
crossing orders. Currently, CBOE Rule 6.74(d)(v) entitles the DPM to a 
participation entitlement of 20% of the original order size when the 
floor broker crosses its 20% at the crowd's price. If the floor broker 
improves upon the crowd's price and takes its 40%, the DPM is not 
entitled to any participation guarantee. The Exchange proposes to 
retain this limitation (i.e., that the percentage of the entitlement 
when combined with the

[[Page 67615]]

amount of the order the floor broker crosses may not exceed 40%), 
recognizing that in most instances the effect of this rule change would 
be that DPMs would not be entitled to participation guarantees (because 
the facilitating firm typically would take its 40% guaranteed amount). 
Necessary changes have been made to the proposed rule language to 
reflect this important limitation.
    Competitive pressures mandate the change from a 20/40% rule to a 
straight 40% rule. International Securities Exchange (``ISE'') Rule 
716(d)(ii) provides Electronic Access Members with at least forty 
percent (40%) of the original size of the order for orders they submit 
through ISE's facilitation mechanism, whether executed at the current 
ISE displayed price or a better price. Accordingly, member firms have a 
strong inducement to send to the ISE orders they would like to 
facilitate. Recently, the Pacific Exchange received approval of rule 
filing SR-PCX-2003-64 in which it too adopted a straight 40% rule.\4\ 
Accordingly, CBOE represents that this proposal is necessary to remain 
competitive in the facilitation arena.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 50473 (September 29, 
2004), 69 FR 60206 (October 7, 2004).
---------------------------------------------------------------------------

2. Statutory Basis
    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.\5\ Specifically, the Exchange believes the 
proposed rule change is consistent with the section 6(b)(5) \6\ 
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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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, 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-2004-04 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-2004-04. 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-2004-04 
and should be submitted on or before December 9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3247 Filed 11-17-04; 8:45 am]
BILLING CODE 8010-01-P