[Federal Register Volume 70, Number 32 (Thursday, February 17, 2005)]
[Notices]
[Pages 8119-8121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-656]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51189; File No. SR-CBOE-2005-12]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by
the Chicago Board Options Exchange, Inc. To Amend its Obvious Error
Rule
February 10, 2005.
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 26, 2005, 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 and
II below, which Items have been prepared by the Exchange. The proposed
rule change has been filed by CBOE as a ``non-controversial'' proposed
rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ On February 9, 2005, CBOE submitted
Amendment No. 1 to the proposed rule change.\5\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
\5\ Amendment No. 1 made technical corrections to the proposed
rule text.
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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 obvious error rule, CBOE Rule 6.25
(Nullification and Adjustment of Equity Options Transactions) to adopt
an erroneous quote provision. The Exchange also proposes to make two
minor grammatical changes to CBOE Rule 24.16 (Nullification and
Adjustment of Index Option Transactions). Additions are italicized.
Deletions are bracketed.
* * * * *
Rule 6.25 Nullification and Adjustment of Equity Options Transactions
* * * * *
(a) Trades Subject to Review
* * * * *
(1)-(4) No Change.
(5) Erroneous Quote in Underlying: Electronic trades (this
provision has no applicability to trades executed in open outcry)
resulting from an erroneous quote in the underlying security may be
adjusted or nullified as set forth in paragraph (a)(1) above. An
erroneous quote occurs when the underlying security has a width of at
least $1.00 and has a width at least five times greater than the
average quote width for such underlying security on the primary market
(as defined in Rule 1.1(v)) during the time period encompassing two
minutes before and after the dissemination of such quote. For purposes
of this Rule, the average quote width shall be determined by adding the
quote widths of each separate quote
[[Page 8120]]
during the four minute time period referenced above (excluding the
quote in question) and dividing by the number of quotes during such
time period (excluding the quote in question).
(b)-(e) No Change.
Interpretations and Policies * * *
No change.
* * * * *
Rule 24.16 Nullification and Adjustment of Index Option Transactions
* * * * *
(a) Trades Subject to Review
* * * * *
(1)--(7) No Change.
(b) Procedures for Reviewing Transactions
(1) Notification: Any member or person associated with a member
that believes it participated in a transaction that may be adjusted or
nullified in accordance with paragraph (a) must notify any Trading
Official promptly but not later than fifteen (15) minutes after the
execution in question. For transactions occurring after 2:45 p.m.
(CT[CST]), notification must be provided promptly but not later than
fifteen (15) minutes after the close of trading of that security on
CBOE. Absent unusual circumstances, Trading Officials shall not grant
relief under this Rule unless notification is made within the
prescribed time periods. In the absence of unusual circumstances,
Trading Officials (either on their own motion or upon request of a
member) must initiate action pursuant to paragraph (a)(3) above within
sixty (60) minutes of the occurrence of the verifiable disruption or
malfunction. When Trading Officials take action pursuant to paragraph
(a)(3), the members involved in the transaction(s) shall receive verbal
notification as soon as is practicable.
(2) No Change
(c) Adjustments
Unless otherwise specified in Rule 24.16(a)(1)-(6), transactions
will be adjusted provided the adjusted price does not violate the
customer's limit price. Otherwise, the transaction will be nullified.
With respect to Rule 24.16(a)(1)-(5), the price to which a transaction
shall be adjusted shall be the National Best Bid (Offer) immediately
following the erroneous transaction with respect to a sell (buy) order
entered on the Exchange. For ROS or HOSS transactions, the price to
which a transaction shall be adjusted shall be based on the first non-
erroneous quote after the erroneous transaction on CBOE. With respect
to Rule 24.16(a)(6), the transaction shall be adjusted to a price that
is $0.10 under parity.
(d)-(e) No Change
Interpretations and Policies * * *
.01-.02 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
The Exchange's obvious error rule, CBOE Rule 6.25,\6\ establishes
guidelines for the adjustment and nullification of transactions in
equity options.\7\ Under the Rule, four types of transactions may
qualify as obvious errors and hence be adjusted or nullified: (1)
Obvious price errors; (2) transactions in series quoted no bid at a
nickel; (3) transactions resulting from verifiable disruptions of
Exchange systems; and (4) transactions resulting from an erroneous
print in the underlying market. The purpose of this proposed rule
change is to re-insert in CBOE Rule 6.25 a fifth type of qualifying
transactions resulting from erroneous quotes in the underlying
security. This provision previously existed in CBOE Rule 6.25.\8\ In
SR-CBOE-2004-83, the Exchange proposed to delete the ``erroneous quote
in the underlying'' provision from CBOE Rule 6.25. However, since the
implementation of the changes set forth in SR-CBOE-2004-83, the
Exchange has experienced several instances involving erroneous quotes
in the underlying security, and therefore, believes that it is
necessary to amend CBOE Rule 6.25 to again provide for this objective
obvious error provision for erroneous quotes in the underlying
security.
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\6\ See Securities Exchange Act Release No. 50880 (December 17,
2004), 69 FR 77790 (December 28, 2004) (File No. SR-CBOE-2004-83).
\7\ CBOE Rule 24.16 governs obvious errors for transactions in
index options and options on ETFs.
\8\ See Securities Exchange Act Release No. 48827 (November 24,
2003), 68 FR 67498 (December 2, 2003) (approving File No. SR-CBOE-
2001-04).
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In this regard, electronic trades resulting from an erroneous quote
in the underlying security may be adjusted or nullified.\9\ An
erroneous quote occurs when the underlying security has a width of at
least $1.00 and has a width at least five times greater than the
average quote width for such underlying security on the primary market,
as defined in CBOE Rule 1.1(v), during the time period encompassing two
minutes before and after the dissemination of such quote. For purposes
of this proposed rule provision, the average quote width shall be
determined by adding the quote widths of each separate quote during the
four-minute time period referenced above (excluding the quote in
question) and dividing by the number of quotes during such time period
(excluding the quote in question). CBOE notes that this provision
operates in the same manner as provisions contained in CBOE Rules 24.16
and 43.5(b)(4).
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\9\ Transactions qualifying for price adjustment (i.e.,
transactions between two CBOE Market-Makers) will be adjusted in
accordance with CBOE Rule 6.25(a)(1). Transactions not qualifying
for price adjustment (i.e., transactions involving a non-CBOE
Market-Maker) will be nullified.
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The Exchange also proposes to make two grammatical changes to CBOE
Rule 24.16. The first would clarify the reference to Central Time as
(CT), rather than (CST) in paragraph (b)(1) of CBOE Rule 24.16. The
second grammatical change would add the word ``rule'' to paragraph (c)
of CBOE Rule 24.16.
2. Statutory Basis
CBOE represents that the filing provides an objective guideline for
the nullification or adjustment of transactions executed at clearly
erroneous prices. For this reason, 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.\10\
Specifically, the Exchange believes the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act \11\
that the rules of an exchange be designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts and
practices and, in general, to protect investors and the public
interest.
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\10\ 15 U.S.C. 78(f)(b).
\11\ 15 U.S.C. 78(f)(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
[[Page 8121]]
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange 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.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change (1) does not significantly
affect the protection of investors or the public interest; (2) does not
impose any significant burden on competition; and (3) by its terms,
does not become operative until 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.
Furthermore, the Exchange provided the Commission with written notice
of its intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule change.
Consequently, the proposed rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6)
thereunder.\13\
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6).
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest. The Commission notes that the proposal to amend CBOE
Rule 6.25 by adding a provision relating to erroneous quotes in the
underlying market is substantially similar to provisions contained in
CBOE Rules 24.16(a)(5) and 43.5 and to a provision that was previously
contained in CBOE Rule 6.25. Thus, the Commission does not believe that
the proposed rule change raises any new issues. For these reasons, the
Commission designates the proposal to be effective and operative upon
filing with the Commission.\14\
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\14\ 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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At any time within 60 days of the filing of this 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.
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-2005-12 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-2005-12. 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-2005-12
and should be submitted on or before March 10, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-656 Filed 2-16-05; 8:45 am]
BILLING CODE 8010-01-P