[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Notices]
[Pages 4165-4167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-318]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51063; File No. SR-CBOE-2004-35]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 Thereto by the Chicago Board Options Exchange, Inc. To 
Require the Immediate Display of Customer Limit Orders

January 21, 2005.

I. Introduction

    On June 17, 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 CBOE Rule 8.85 to 
require the immediate display of customer limit orders. The proposed 
rule change was published for comment in the Federal Register on July 
2, 2004.\3\ No comments were received regarding the proposal. CBOE 
filed Amendments No. 1 and 2 with the Commission on August 31, 2004,\4\ 
and January 6, 2005,\5\ respectively. This order approves the proposed 
rule change, grants accelerated approval to Amendment No. 2, and 
solicits comment on Amendment No 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 49916 (June 25, 
2004), 69 FR 40422 (``Notice of the Proposal'').
    \4\ See letter from Steve Youhn, Assistant Secretary, CBOE, to 
Nancy Sanow, Assistant Director, Commission, Division of Market 
Regulation, dated August 30, 2004 (``Amendment No. 1''). In 
Amendment No. 1, CBOE corrected a typographical error in the 
proposed rule text. Because Amendment No. 1 is a technical 
amendment, it is not subject to notice and comment.
    \5\ See Amendment No. 2, dated January 6, 2005, submitted by 
Steve Youhn, Assistant Secretary, CBOE (``Amendment No. 2''). In 
Amendment No. 2, CBOE proposes a minor modification to the 
exemptions to the Display Obligation.
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II. Description of Proposed Rule

    CBOE proposes to amend CBOE Rule 8.85(b)(i) to codify an immediate 
display requirement with respect to eligible customer limit orders \6\ 
(``Display Obligation''). Under the proposal, each DPM would be 
required

[[Page 4166]]

to display the price and full size of eligible customer limit orders 
when such orders represent buying or selling interest that is at a 
better price than the best disseminated CBOE quote. A DPM also must 
increase the size of its quote to reflect a limit order priced equal to 
the CBOE disseminated quote. In proposed CBOE Rule 8.85(b)(i), CBOE 
proposes to define ``immediately'' to mean, under normal market 
conditions, as soon as practicable but no later than 30 seconds after 
receipt by the DPM.\7\
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    \6\ CBOE proposes to define the term ``customer limit order'' as 
``an order to buy or sell a listed option at a specified price that 
is not for the account of either a broker or dealer; provided, 
however, that the term customer limit order shall include an order 
transmitted by a broker or dealer on behalf of a customer.'' 
Proposed CBOE Rule 8.85(b)(i).
    \7\ In its filing, CBOE states that ``receipt by the DPM'' means 
receipt on the PAR terminal in the DPM trading crowd, which is 
consistent with the firm quote definition of ``time of receipt.'' 
This means that the time of receipt is when the order is received on 
PAR, even if the DPM or PAR operator does not happen to see it for 
several seconds.
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    CBOE proposes to exempt, or partially exempt, certain orders from 
the Display Obligation. Specifically, CBOE proposes to exempt orders 
executed upon receipt as well as any order where the customer who 
placed it requests that the order not be displayed, if upon receipt of 
the order the DPM announces via public outcry the information about the 
order that would be displayed if the order were subject to display. 
CBOE further proposes an exemption from the Display Obligation for 
orders for which, immediately upon receipt, a related order for the 
principal account of a DPM reflecting the terms of the customer order 
is routed to another options exchange that is a participant in the 
intermarket options linkage plan.\8\ Exempt order types would also 
include contingency orders (i.e., market-if-touched, market-on-close, 
stop (stop-loss), and stop-limit orders), one-cancels-the-other orders, 
all or none orders, fill or kill orders, immediate or cancel orders, 
complex orders (i.e., spread, combination, straddle and stock-option 
orders), orders received during a trading rotation (although once the 
trading rotation ends such orders would then be subject to the Display 
Obligation), and orders of more than 100 contracts, unless the customer 
placing such order requests that it be displayed.\9\
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    \8\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (order approving the Plan for 
the Purpose of Creating and Operating an Intermarket Option 
Linkage).
    \9\ For a complete discussion of these exempt order types, see 
Notice of the Proposal, supra note 3.
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III. Commission Findings and Order Granting Approval

    The Commission 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 \10\ and, in 
particular, the requirements of section 6(b)(5) of the Act,\11\ which 
requires, among other things, 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 foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, 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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    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that the display of customer 
options limit orders that improve the price or size of the best 
disseminated CBOE quote should promote transparency and enhance the 
quality of executions of customer limit orders on CBOE. The proposed 
amendments to CBOE Rule 8.85 introduce requirements for customer limit 
order display that are comparable to the requirements of the 
Commission's Display Rule, Rule 11Ac1-4 under the Act,\12\ which is 
applicable to customer limit orders received in the equity market. In 
addition, the Commission believes that the Exchange's proposal to 
exempt all-or-none, fill-or-kill, immediate-or-cancel, and large sized 
orders from the Display Obligation is reasonable since these order 
types are either identical or substantially similar to order types 
exempt from the Commission's Display Rule.
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    \12\ 17 CFR 240.11Ac1-4.
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    The Commission also believes that it is consistent with the Act for 
CBOE to exempt from the Display Obligation under its rules market-if-
touched, stop-limit, and stop or stop-loss orders. These orders are 
contingent orders that are subject to a particular triggering event 
and, thus, are not available for execution until the triggering event 
occurs. A market-if-touched or stop-loss order becomes a market order 
when triggered and thus is not subject to the Display Obligation 
because such an order would then be immediately executable. A stop-
limit order becomes a limit order when the triggering event occurs. 
This limit order would be subject to the Display Obligation.
    Market-on-close orders may not be represented, displayed or booked 
until as near as possible to the close of trading, and, therefore, the 
Commission believes it is reasonable to exempt such orders from the 
Display Obligation. Spread, combination, straddle, stock-option, and 
one-cancels-the-other orders are complex orders with more than one 
component and, thus, the Commission believes, are not suitable for 
display.
    During a trading rotation, CBOE systems attempt to set an opening 
price for the series. Until that opening price is established, there is 
no disseminated market. Therefore, it is reasonable to exempt orders 
received during a trading rotation from the Display Obligation. The 
Commission notes, however, that once the trading rotation ends, any 
orders not executed would then be subject to the Display Obligation.
    Finally, the Exchange proposes to exempt from the Display 
Obligation customer orders for which a related order for the principal 
account of a DPM reflecting the terms of the customer order is routed 
to another options exchange. The Commission believes it is reasonable 
to exempt such orders since they are subject to execution upon receipt 
at the other options exchange. Moreover, the Exchange represents that 
if an order routed to another options exchange is cancelled in whole or 
in part by the other exchange, then the order would be subject to the 
Display Obligation immediately upon receipt of the cancellation notice 
by the Exchange.
    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after their 
publication in the Federal Register, pursuant to section 19(b)(2) of 
the Act.\13\ Amendment No. 2 made a minor modification to the exemption 
for customer orders for which a related order reflecting the terms of 
the customer order is immediately delivered to another exchange for 
execution. Acceleration of Amendment No. 2 will permit the Exchange to 
implement the proposal in an expeditious manner. The Commission, 
therefore, believes that good cause exists, consistent with section 
6(b)(5) \14\ and section 19(b) \15\ of the Act, to accelerate approval 
of Amendment No. 2.
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78s(b).
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IV. Solicitation of Comments Concerning Amendment No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether it is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

[[Page 4167]]

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-2004-35 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-2004-35. 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 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-2004-35 and should be submitted on or before 
February 18, 2005.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (File No. SR-CBOE-2004-35) be 
approved, and that Amendment No. 2 thereto be approved on an 
accelerated basis.
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    \16\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-318 Filed 1-27-05; 8:45 am]
BILLING CODE 8010-01-P