[Federal Register Volume 70, Number 34 (Tuesday, February 22, 2005)]
[Notices]
[Pages 8647-8648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-680]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51205; File No. SR-CBOE-2004-72]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 by the Chicago Board Options Exchange, 
Incorporated Relating to the SizeQuote Mechanism Pilot Program

February 15, 2005.
    On November 10, 2004, the Chicago Board Options Exchange, 
Incorporated (``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 6.74, 
``Crossing Orders,'' to adopt, on a one-year pilot basis, a ``SizeQuote 
Mechanism'' for the execution of large-sized orders in open outcry. On 
December 22, 2004, the CBOE filed Amendment No. 1 to the proposal. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on January 12, 2005.\3\ The Commission received no 
comments regarding the proposal. This order approves the proposed rule 
change, as amended.
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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. 50967 (January 5, 
2005), 70 FR 2197 (``January Release'').
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    The proposed SizeQuote Mechanism is a procedure by which floor 
brokers may execute and facilitate large-sized orders of at least 250 
contracts in open outcry.\4\ Under the proposed procedures, a floor 
broker must be willing to facilitate the entire size of the order for 
which he or she requests quotes through the SizeQuote Mechanism (the 
``SizeQuote Order'').\5\
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    \4\ The appropriate CBOE Market Performance Committee will 
determine the options classes in which SizeQuote operates and may 
vary the minimum size of the orders eligible for SizeQuote, 
provided, however, that the minimum qualifying order size may not be 
less than 250 contracts.
    \5\ A floor broker may not execute a SizeQuote Order at a price 
inferior to the national best bid or offer (``NBBO''). See proposed 
CBOE Rule 6.74(f)(i)(E).
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    As described more fully in the January Release,\6\ a floor broker 
seeking to use the SizeQuote trading procedure must specifically 
request a ``SizeQuote'' from in-crowd market participants (``ICMPs''), 
who may respond with indications of the price and size at which they 
would be willing to trade with the SizeQuote Order.\7\ ICMPs that 
provide SizeQuote responses at the highest bid or lowest offer (the 
``best price'') have priority to trade with the SizeQuote Order at that 
best price and at a price equal to one trading increment better than 
the best price (the ``improved best price'').\8\ Allocation of the 
SizeQuote Order among ICMPs will be pro rata, up to the size of each 
ICMP's SizeQuote response. If the ICMPs providing the best price or the 
improved best price do not execute the entire SizeQuote Order, the 
floor broker representing the SizeQuote Order must trade the remaining 
contracts at the best price or the improved best price, as applicable. 
A floor broker may execute the entire SizeQuote Order at a price two 
trading increments better than the best price provided by the ICMPs in 
their responses to the SizeQuote request.
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    \6\ See note 4, supra.
    \7\ CBOE Rule 6.45A, ``Priority and Allocation of Trades for 
CBOE Hybrid System,'' defines an ``in-crowd market participant'' to 
include an in-crowd Market-Maker, an in-crowd DPM, or a floor broker 
representing orders in the trading crowd.
    \8\ However, a public customer order in the electronic book has 
priority to trade with a SizeQuote Order over any ICMP providing a 
SizeQuote response at the same price as the order in the electronic 
book. See proposed CBOE Rule 6.74(f)(i)(C).
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    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, and, in 
particular, with the requirements of section 6(b)(5) of the Act,\9\ 
which requires, among other

[[Page 8648]]

things, that the rules of a national securities exchange be designed to 
promote just and equitable principles of trade, 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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    \9\ 15 U.S.C. 78f(b)(5). In approving this proposed rule change, 
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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    The CBOE believes that the SizeQuote Mechanism will create enhanced 
incentives for ICMPs to quote competitively by giving ICMPs that 
respond to a SizeQuote request at the best price priority to trade with 
the SizeQuote Order at that best price and at the improved best price 
(i.e., one trading increment better), as described above.\10\ Moreover, 
ICMPs will have only one opportunity to respond to a SizeQuote request, 
and ICMPs that do not respond at the best price will lose the 
opportunity to trade with the SizeQuote Order. The Commission believes 
that these procedures may encourage ICMPs to quote more competitively. 
The Commission notes, in addition, that if ICMPs providing SizeQuote 
responses do not execute the entire SizeQuote Order, the floor broker 
representing the SizeQuote Order must trade any remaining contracts at 
the best price, or at the improved best price, as applicable. At the 
same time, because the floor broker would be permitted to execute the 
entire SizeQuote Order at two increments better than the ICMPs' best 
price, the Commission believes it is essential for the Exchange to 
monitor the impact of the proposed rule change on the competitive 
process. Thus, the Commission is approving the proposed rule change on 
a one-year pilot basis. The CBOE has represented that it will provide 
the Commission, at the end of the pilot period, a report summarizing 
the effectiveness of the SizeQuote Mechanism. The Commission intends to 
carefully review this report before approving any extension of the 
program.
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    \10\ A public customer order in the electronic book has priority 
to trade with a SizeQuote Order over any ICMP providing a SizeQuote 
response at the same price as the order in the electronic book. See 
CBOE Rule 6.74(f)(i)(C).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2004-72), as amended, 
is approved on a pilot basis until February 15, 2006.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-680 Filed 2-18-05; 8:45 am]
BILLING CODE 8010-01-P