[Federal Register Volume 70, Number 14 (Monday, January 24, 2005)]
[Notices]
[Pages 3404-3407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-213]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51030; File No. SR-CBOE-2004-91]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Chicago Board Options Exchange, Incorporated To Extend a Pilot 
Program and Eliminate the Rule Prohibiting Electronically Generated and 
Communicated Orders

January 12, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 29, 2004, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities

[[Page 3405]]

and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. On January 7, 2005, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ The Exchange filed the proposal, as 
amended, as a ``non-controversial'' proposed rule change pursuant to 
Section 19(b)(3)(A)(iii) of the Act \4\ and Rule 19b-4(f)(6) 
thereunder.\5\ The Commission is publishing 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 Form 19b-4 dated January 7, 2005 (``Amendment No. 1''). 
Amendment No. 1 made minor revisions to Item 7 of the proposed rule 
change as originally filed.
    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to extend the pilot program in CBOE Rule 6.13 
relating to market maker access to the Exchange's automatic execution 
system and to eliminate CBOE Rule 6.8A prohibiting the electronic 
generation and communication of orders.
    Below is the text of the proposed rule change. Proposed additions 
are italicized; proposed deletions are [bracketed].

Rules of the Chicago Board Options Exchange

* * * * *
Rule 6.8A. [Electronically Generated and Communicated Orders] Reserved

    [(a) Members may not enter, nor permit the entry of, orders into 
the Exchange's Order Routing System if those orders are created and 
communicated electronically without manual input (i.e., order entry 
must involve manual input such as entering the terms of an order into 
an order-entry screen or manually selecting a displayed order against 
which an off-setting order should be sent), and if such orders are 
eligible for execution on RAES at the time they are sent. Nothing in 
this paragraph, however, prohibits members from electronically 
communicating to the Exchange orders manually entered by customers into 
front-end communication systems (e.g., Internet gateways, online 
networks, etc.). An order is eligible for execution on RAES if:
    (1) Its size is equal to or less than the maximum RAES order size 
for the particular series;
    (2) For public customer orders, the order is marketable or is 
tradable pursuant to the RAES auto step-up feature at the time it is 
sent; or for broker-dealer orders, the order is otherwise submitted in 
accordance with Interpretation .01 of Rule 6.8; and
    (3) If the order has either no contingency or has a contingency 
that is accepted for execution by the RAES system.
    A marketable order is a market order or a limit order where the 
specified price to sell is below or at the current bid, or if to buy is 
above or at the current offer. An order is tradable pursuant to the 
RAES auto step-up feature if the appropriate Floor Procedure Committee 
has designated the class as an automatic step-up class and if the 
National Best Bid or Offer for the particular series is reflected by 
the current best bid or offer in another market by no more than the 
step-up amount as defined in Interpretation .02 of Rule 6.8.
    (b) The Exchange's Order Routing System ( ``ORS'') is the 
Exchange's electronic order routing and delivery system which routes 
orders to the Exchange's automatic and electronic execution systems and 
to other Exchange systems, such as handheld terminals and trade match 
systems. The ORS also delivers electronic fill reports and order status 
reports.]

Rule 6.13. CBOE Hybrid System's Automatic Execution Feature

    (a) No change.
    (b) Automatic Execution.
    (i) * * *
    (A)-(B) No change.
    (C) Access:
    (i)-(ii) No Change.
    (iii) 15-Second Limitation: With respect to orders eligible for 
submission pursuant to paragraph (b)(i)(C)(ii), members shall neither 
enter nor permit the entry of multiple orders on the same side of the 
market in an option class within any 15-second period for an account or 
accounts of the same beneficial owner. The appropriate FPC may shorten 
the duration of this 15-second period by providing notice to the 
membership via a Regulatory Circular that is issued at least one day 
prior to implementation. The effectiveness of this rule shall terminate 
on [January 12, 2005] October 12, 2005.
* * * * *
    (ii)-(iv) No change.
    (c) * * *
    (i) No change.
    (ii) * * *
    (A) No change.
    (B) [Electronic generation and communication of orders in violation 
of Rule 6.8A by non-trading crowd participants.]
    [(C)] Effecting transactions that constitute manipulation as 
provided in Rule 4.7 and Exchange Act Rule 10b-5.
    (d)-(e) 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Commission in 2004 approved on a pilot basis CBOE Rule 
6.13(b)(i)(C)(iii) relating to the frequency with which certain market 
participants could submit orders for execution through the Exchange's 
Hybrid Trading System.\6\ Rule 6.13(b)(i)(C)(iii) provides in relevant 
part:

    \6\ See Securities Exchange Act Release No. 50005 (July 12, 
2004), 69 FR 43032 (July 19, 2004) (SR-CBOE-2004-33).

    (iii) 15-Second Limitation: With respect to orders eligible for 
submission pursuant to paragraph (b)(i)(C)(ii), members shall 
neither enter nor permit the entry of multiple orders on the same 
side of the market in an option class within any 15-second period 
for an account or accounts of the same beneficial owner. The 
appropriate FPC may shorten the duration of this 15-second period by 
providing notice to the membership via a Regulatory Circular that is 
issued at least one day prior to implementation. The effectiveness 
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of this rule shall terminate on January 12, 2005. * * *

    Upon approval of CBOE Rule 6.13(b)(i)(C)(iii), the Exchange began 
allowing orders from options market makers to be eligible for automatic 
execution, subject to the 15-second limitation described above. As the 
pilot period is scheduled to expire on January 12, 2005, the Exchange 
proposes to extend the pilot program for a nine-month period. The 
Exchange believes that the pilot program has been successful in 
attracting market maker volume to the Exchange. In this regard, the 
Exchange represents that during November 2004, the number of average

[[Page 3406]]

daily transactions involving options market maker orders submitted 
through the Exchange's Order Routing System (``ORS'') increased more 
than 300% compared to pre-pilot period transactions, and the average 
daily volume involving options market maker orders submitted through 
the Exchange's ORS almost doubled when compared to pre-pilot period 
volume. The Exchange notes that given the early success of the pilot 
program, the Exchange proposes to extend the pilot program's duration 
nine months, until October 12, 2005.
    The Exchange also proposes to delete CBOE Rule 6.8A, Electronically 
Generated and Communicated Orders, and all other existing references to 
CBOE Rule 6.8A. When the Exchange adopted CBOE Rule 6.13(b)(i)(C)(iii), 
CBOE market makers and Designated Primary Market Makers (DPMs) did not 
have the protections available to them that they have today to prevent 
the rapid influx of orders. For this reason, CBOE Rule 6.8A when 
adopted was necessary to prevent excessive exposure. Today, market 
makers have the ability to manage their exposure more quickly and 
efficiently, thereby obviating the need for the CBOE Rule 6.8A.\7\
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    \7\ In this regard, the Exchange notes that the Philadelphia 
Stock Exchange eliminated its electronic generation rule in 2003. 
See Securities Exchange Act Release No. 48648 (October 16, 2003), 68 
FR 60762 (October 23, 2003) (SR-Phlx-2003-37).
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2. Statutory Basis
    The Exchange believes that the extension of the pilot program will 
allow the Exchange to continue to provide auto-ex access to all options 
market makers, and that elimination of the electronic generation of 
orders prohibition will enhance access to the Exchange. Accordingly, 
the Exchange believes the proposed rule change is consistent with the 
Act \8\ 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.\9\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \10\ 
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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    \8\ 15 U.S.C. 78a et seq.
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\ At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on January 7, 2005, the date the Exchange filed 
Amendment No. 1 to the proposed rule change. See 15 U.S.C. 
78s(b)(3)(C).
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    The Exchange has requested that the Commission waive the 30-day 
operative delay under Rule 19b-4(f)(6)(iii).\14\ The Commission 
believes that the waiver of the 30-day operative delay is consistent 
with the protection of investors and the public interest. Acceleration 
of the 30-day operative period delay would allow the pilot program to 
continue uninterrupted and would remove immediately the restriction on 
the entry into the Exchange's ORS of electronically generated and 
communicated orders.\15\ For this reason, the Commission designates 
this proposal to be operative upon filing with the Commission.
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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-2004-91 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-2004-91. 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 the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2004-91 and should

[[Page 3407]]

be submitted on or before February 14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E5-213 Filed 1-21-05; 8:45 am]
BILLING CODE 8010-01-P