[Federal Register Volume 70, Number 39 (Tuesday, March 1, 2005)]
[Notices]
[Pages 10006-10010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-801]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51234; File No. SR-CBOE-2004-58]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and 2 Thereto by the Chicago Board Options 
Exchange, Incorporated Relating to Market-Maker Quoting and Market-
Maker Appointments

February 22, 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 August 19, 2004, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in items I, II, and III below, which items have been prepared 
by CBOE. On February 2, 2005, CBOE filed Amendment No. 1 to the 
proposed rule change.\3\ On February 17, 2005, CBOE filed Amendment No. 
2 to the proposed rule change.\4\ 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\ Amendment No. 1 replaces and supercedes CBOE's original 19b-
4 filing in its entirety.
    \4\ Amendment No. 2 replaces and supercedes CBOE's original 19b-
4 filing and Amendment No. 1 in their entirety.
---------------------------------------------------------------------------

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

    CBOE proposes to amend existing rules and adopt new rules governing 
quoting by Market-Makers (``Market-Makers'' or ``MM'').
    The text of the proposed rule change, as amended, is available on 
the CBOE's Web site (http://www.cboe.com), at the CBOE's Office of the 
Secretary, and at the Commission's Public Reference Room.

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
    On July 12, 2004, the Commission approved a CBOE proposal to add a 
new category of market-making participant called ``e-DPMs,'' who 
function as remote competing specialists in their allocated securities. 
By contrast, regular Designated Primary Market-Makers (``DPMs'') and 
Market Makers (``MMs'') on CBOE are required to operate from within 
their appointed trading station. The ability to stream quotes 
electronically from remote locations (i.e., outside of the individual's 
appointed trading station) is an option the Exchange believes would 
enhance the competitiveness of its MMs.\5\ Accordingly, the Exchange 
proposes to grant its MMs the ability to stream quotes from locations 
other than their appointed trading stations.\6\ As such, the Exchange 
proposes to amend its rules governing the MM appointment process (CBOE 
Rule 8.3), and MM obligations (CBOE Rule 8.7), and to adopt new CBOE 
Rule 8.3A to establish an upper limit on the number of members that may 
quote electronically in a given product.
---------------------------------------------------------------------------

    \5\ For example, rather than ``calling in sick'' to work and 
thereby relinquishing the ability to quote altogether, a MM would be 
able to stream quotes from his/her home office. CBOE believes that 
allowing the MM to continue to quote increases liquidity available 
in the class, thereby enhancing the competitiveness of the Exchange.
    \6\ This rule filing only allows current MMs to quote remotely 
(i.e., from outside of their appointed trading stations). File No. 
SR-CBOE-2004-75 establishes rules for Remote Market-Makers. See 
Securities Exchange Act Release No. 51107 (January 31, 2005), 70 FR 
6051 (February 4, 2005) (``RMM filing'').
---------------------------------------------------------------------------

CBOE Rule 8.1 Market-Maker Defined
    The Exchange proposes to amend the definition of MM to remove the 
requirement that transactions be effected on the floor of the Exchange. 
As amended, transactions effected in accordance with CBOE Rule 8.7.03 
would count as MM transactions.
CBOE Rule 8.3 Appointment of Market-Makers
    Currently, a MM's appointment consists of all classes traded at a 
particular station, regardless of the number of classes actually 
trading at that station and regardless of whether the MM owns or leases 
a membership. In addition, CBOE Rule 8.3(c) currently provides that MMs 
may have appointments in up to ten trading stations on the floor. The 
Exchange proposes to amend these requirements in several respects.
    First, as proposed, a MM's appointment would confer the right to 
quote electronically in all classes traded on the Hybrid Trading System 
that are located in one designated trading station (``appointed trading 
station'') and it would confer the right to quote in open outcry all 
classes traded on the Exchange, regardless of the trading station at 
which they are located. With respect to Hybrid 2.0 Classes (as defined 
in proposed CBOE Rule 1.1(aaa)), a MM would only be eligible to submit 
electronic quotations in up to 40 classes for each Exchange membership 
it owns or up to 30 classes for each Exchange membership it leases, all 
of which must be located in the MM's appointed trading station.\7\
---------------------------------------------------------------------------

    \7\ If a trading station consists of less than 40 (30) Hybrid 
2.0 classes, each MM that owns (leases) a membership would be 
eligible to submit electronic quotations in each of the Hybrid 2.0 
classes at that trading station, in accordance with the requirements 
of CBOE Rule 8.3A.
---------------------------------------------------------------------------

    This means that a MM would only be eligible to submit electronic 
quotations into classes located at one appointed trading station. A MM 
also would be eligible to trade in open outcry in any classes on the 
Exchange, irrespective of the trading station in which such classes are 
located.\8\ A MM that trades in open outcry away from his/her appointed 
trading station would be restricted to open outcry trading only and 
would not be eligible to quote electronically in those classes until 
such time that the MM notifies the Exchange of his/her intent to change 
his/her appointment. On any day a MM trades in open outcry outside of 
his/her appointed trading station, that MM may be required to undertake 
market-making obligations in

[[Page 10007]]

those classes in which the MM trades in open outcry at the request of 
the Order Book Official.\9\
---------------------------------------------------------------------------

    \8\ For margin purposes, these transactions would qualify as MM 
transactions.
    \9\ See CBOE Rule 8.7(c), discussed infra.
---------------------------------------------------------------------------

    The proposal limits a MM's appointments to the classes located at 
no more than one trading station. In Hybrid, MMs currently may only 
stream quotes where they are physically present in the trading crowd, 
which in essence already creates a ``one trading station'' 
appointment.\10\ As is the case today, MMs would continue to be able to 
leave one trading station and trade in another appointed trading 
station; however, they would be required to notify the Exchange prior 
to switching trading stations and request an appointment in the classes 
located at a new trading station, which would be granted on a space-
available basis (as described in more detail in proposed CBOE Rule 
8.3A). A MM's ability to trade in non-appointed classes would be 
limited to submitting orders for automatic execution pursuant to CBOE 
Rules 6.8 or 6.13.\11\
---------------------------------------------------------------------------

    \10\ The Exchange represents that it is gradually transferring 
all equity classes to the Hybrid Trading System and anticipates 
having all such classes on Hybrid within the first quarter of 2005.
    \11\ As part of its appointment, a MM may trade in open outcry 
all classes located on the Exchange. See proposed CBOE Rule 
8.7(b)(iii) for the permissible methods by which MMs may submit 
quotes and orders in appointed and non-appointed classes. CBOE Rule 
6.8 applies to non-Hybrid classes, while CBOE Rule 6.13 applies to 
Hybrid classes.
---------------------------------------------------------------------------

    Proposed changes to CBOE Rule 8.3(c) also allow a MM to quote 
remotely. In this regard, with respect to Hybrid classes located at 
his/her appointed trading station, a MM may submit electronic 
quotations in the classes in his/her appointed trading station from a 
location other than the appointed trading station.\12\ The one proposed 
restriction on this ability would prohibit a MM affiliated with an e-
DPM from submitting electronic quotations from outside of the appointed 
trading station in any class in which the affiliated e-DPM has an 
appointment.\13\
---------------------------------------------------------------------------

    \12\ With respect to Hybrid 2.0 classes, a MM would only be 
permitted to quote electronically into those classes to which it is 
appointed and no more than 40 (30) for each membership it owns 
(leases).
    \13\ See CBOE Rule 8.93(vii). See also proposed CBOE Rule 
8.4(c)(i) in the Exchange's proposed RMM filing. The same 
prohibition would apply to MMs affiliated with RMMs and is 
contingent upon SEC approval of the Exchange's RMM filing (see supra 
note 6).
---------------------------------------------------------------------------

    Finally, proposed CBOE Rule 8.3(c) provides that a MM would be 
presumed to have an appointment in all non-Hybrid 2.0 classes located 
at his/her appointed trading station unless the MM specifically 
indicates to the Exchange that he/she does not want to include a 
particular class(es) as part of his/her appointment (``excluded 
classes'').\14\ CBOE represents that the purpose in allowing MMs to 
exclude classes from their appointments is to allow the Exchange to 
improve the amount of liquidity provided in these classes. When a MM 
excludes a class, the Exchange would be able to provide an appointment 
in that excluded class to a MM that does not currently trade that class 
but who has an interest in doing so. This situation is much more 
favorable and beneficial than one of the likely alternatives: Allowing 
a MM that does not want to trade that class but is required to do so 
because it is located in his/her appointed trading station to stream 
wider and less competitive quotes. A MM is not eligible to submit 
electronic quotations into any class it designates as an excluded 
class. Any request by a MM to receive a subsequent appointment in a 
previously excluded class would be handled in accordance with proposed 
CBOE Rule 8.3A.
---------------------------------------------------------------------------

    \14\ Because MMs must specifically designate which Hybrid 2.0 
classes they would trade as part of their appointment, there is no 
need to have them designate which Hybrid 2.0 classes they would not 
trade.
---------------------------------------------------------------------------

CBOE Rule 8.7 Obligations of Market-Makers
    The Exchange proposes several changes to CBOE Rule 8.7 to allow MMs 
to quote from outside of their appointed trading stations. The Exchange 
proposes to revise CBOE Rule 8.7(b)(i) to remove the exclusive physical 
presence requirement. Accordingly, as revised, MMs would have an 
obligation to compete with other MMs to improve markets in all series 
of options classes comprising the MM's appointment, whether trading 
electronically or in person. The proposed revision to (b)(ii) clarifies 
that a MM's firm quote obligation applies to all series in which the MM 
quotes.
    The Exchange proposes to amend CBOE Rule 8.7(b)(iii) in two primary 
respects. The first change proposes to remove the exclusive physical 
presence requirement and states that a MM has an obligation to update 
quotes in his/her appointed classes at the trading station where the MM 
quotes (whether in-person or electronically). The second change is 
designed to clarify the permissible methods by which a MM may submit 
quotes and orders in both appointed and non-appointed classes. Proposed 
new paragraph (iii)(A) provides that with respect to trading in 
appointed classes:
    (1) MMs who are physically present in their appointed trading 
station may enter quotes and orders in their appointed classes by 
public outcry in response to a request for a quote or, in classes in 
which Hybrid or Hybrid 2.0 is implemented, through an Exchange-approved 
electronic interface via an Exchange-approved quote generation device.
    (2) MMs may also enter quotes and orders in their appointed Hybrid 
and Hybrid 2.0 classes from outside of their appointed trading stations 
(pursuant to CBOE Rule 8.3) through an Exchange-approved electronic 
interface via an Exchange-approved quote generation device.
    (3) MMs, whether in their appointed trading stations or not, may 
also submit orders for automatic execution in accordance with the 
requirements of CBOE Rules 6.8 or 6.13. Proposed paragraph (b)(iii) 
provides that with respect to trading in non-appointed classes,

MMs may submit orders for automatic execution in accordance with the 
requirements of CBOE Rules 6.8 or 6.13.\15\ In this regard, CBOE Rule 
8.3 also would prohibit a MM from quoting electronically into a non-
appointed class.
---------------------------------------------------------------------------

    \15\ CBOE Rule 6.8 applies to non-Hybrid classes, while CBOE 
Rule 6.13 applies to Hybrid classes.
---------------------------------------------------------------------------

    The Exchange proposes changes to paragraph (c) to ensure that a MM 
who trades in classes located outside of his appointed trading station 
would be required to fulfill all obligations imposed by CBOE Rule 
8.7(b) and, for the rest of the trading day, the MM may be called back 
to that station to make markets in open outcry in the classes in which 
they traded.
    Current CBOE Rule 8.7(d) governs market-making obligations in 
Hybrid classes. Generally, the extent of a MM's obligations is dictated 
by the amount of volume a MM transacts electronically. The Exchange 
intends to retain paragraph (d)(i) \16\ and amend paragraph (d)(ii). As 
amended, MMs that transact more than 20% of their volume electronically 
would be obligated to comply with the bid-ask width requirements of 
CBOE Rule 8.7(b)(iv),\17\ maintain continuous quotes for at least ten 
contracts in 60% of the series of his/her appointed classes,\18\ and 
respond to all open outcry requests for quotes with

[[Page 10008]]

a ten-up, legal width market.\19\ Proposed for elimination is the 
tiered continuous quoting requirement that is dependent upon the amount 
of volume transacted electronically on the Exchange. CBOE believes an 
across-the-board 60% quoting requirement is simpler and more effective.
---------------------------------------------------------------------------

    \16\ Paragraph (d)(i) applies to MMs that transact less than 20% 
of their contract volume electronically.
    \17\ Currently $5 except during the opening rotation.
    \18\ A MM's undecremented quote must be for ten contracts unless 
the underlying market disseminates a 1-up market, in which case MMs 
who have automated the process may similarly quote 1-up. This ``1-
up'' pilot program is scheduled to expire on August 17, 2005. See 
CBOE Rules 8.7(d)(i)(B) and (d)(ii)(B).
    \19\ Only MMs physically present in a trading station would have 
the ability to provide markets in open outcry.
---------------------------------------------------------------------------

    The Exchange also proposes changes to Interpretations and Policies 
.03 to CBOE Rule 8.7. All MMs would still be required to comply with 
CBOE Rule 8.7.03(A), which requires 75% of a MM's volume to be in his/
her appointed classes. The Exchange intends to retain the in-person 
requirement contained in current paragraph (B) yet limit its 
application to non-Hybrid classes. Because MMs would have the ability 
to quote from outside of their appointed trading stations, CBOE 
believes that an in-person requirement no longer makes sense.\20\
---------------------------------------------------------------------------

    \20\ A MM's ability to quote electronically from outside of its 
appointed trading station is limited to appointed Hybrid and Hybrid 
2.0 classes, as described and proposed in CBOE Rule 8.3(c).
---------------------------------------------------------------------------

    Finally, the Exchange proposes to amend CBOE Rule 8.8.01's 
definition of ``station'' to remove the requirement that an appointment 
must at least include all of the classes of options traded at one 
station.\21\ As proposed in CBOE Rule 8.3, a MM would be presumed to 
have an appointment in all non-Hybrid 2.0 classes located at his/her 
appointed trading station unless the MM specifically excludes specific 
classes. The ability of MMs to exclude classes from their appointments 
renders necessary the change to CBOE Rule 8.8.01.
---------------------------------------------------------------------------

    \21\ This same proposed amendment appears in File No. SR-CBOE-
2004-75.
---------------------------------------------------------------------------

CBOE Rule 8.3A Maximum Number of Market Participants Quoting 
Electronically Per Product
    The Exchange does not have unlimited systems bandwidth capacity to 
support an unlimited number of electronic quoters in every class. For 
this reason, the Exchange would limit the number of members quoting 
electronically in each product (``Class Quoting Limit'' or ``CQL'') 
traded on Hybrid or Hybrid 2.0.\22\ By limiting the number of quoters 
in all Hybrid and Hybrid 2.0 classes/products, the Exchange ensures it 
would have the ability to effectively handle all quotes generated by 
members. The number of members permitted to quote in each product is 
specified in proposed CBOE Rule 8.3A.01. The methodology for 
determining which members would be able to quote electronically in a 
product is governed by proposed CBOE Rule 8.3A(a)-(c).
---------------------------------------------------------------------------

    \22\ For purposes of this rule, the term ``product'' refers to 
all options of the same single underlying security/value.
---------------------------------------------------------------------------

    When a CQL is established for each product, the following criteria 
govern which members are entitled to quote electronically in that 
subject product. A MM (excluding the e-DPM) that is not eligible to 
quote electronically in a product still may quote in open outcry in 
that product.
Products Trading on the Hybrid 2.0 Platform as of January 6, 2005 and 
Products Trading on the Hybrid Trading System as of January 6, 2005
    The DPM and e-DPMs (if applicable \23\) assigned to the product on 
January 6, 2005, and MMs who: (1) Are in good standing with the 
Exchange; and (2) (i) have transacted at least 80% of their MM 
contracts and transactions in-person in each of the three immediately 
preceding calendar months prior to January 6, 2005 in option products 
traded in the trading station; or (ii) were physically present in the 
trading station acting in the capacity of a MM on January 6, 2005, are 
entitled to quote electronically in those products for as long as they 
maintain an appointment those products.\24\
---------------------------------------------------------------------------

    \23\ Non-Hybrid 2.0 classes do not have e-DPMs.
    \24\ CBOE represents that the practical effect of this rule is 
to ensure that the DPM, all MMs, and all e-DPMs would be guaranteed 
the ability to quote electronically in products trading at their 
primary trading stations as of January 6, 2005. There were no 
products as of this date for which the number of members quoting 
electronically exceeded the CQL for that product.
---------------------------------------------------------------------------

    All other MMs and approved e-DPMs that request the ability to 
submit quotes electronically in the subject product would be entitled 
to quote electronically in that product in the order in which they so 
request provided the number of members quoting electronically in the 
product does not exceed the CQL. When the number of members in the 
product quoting electronically equals the CQL, all other members 
requesting the ability to quote electronically in that product would be 
wait-listed in the order in which they submitted the request.
    The waiting list operates based on time priority. When the product 
can accommodate another electronic quoter (whether due to attrition or 
an increase in the CQL), the member at the ``top'' of the list (i.e., 
the member that has been on the waiting list the longest amount of 
time) has priority. Once a member is wait-listed, the Exchange may not 
alter his/her position on the wait-list other than to improve such 
position (i.e., the Exchange may not place other members ahead of a 
previously wait-listed member). If a wait-listed member is offered, yet 
refuses, the ability to quote electronically in the subject product, 
the member would be removed from that waiting list.
Products Added to the Hybrid 2.0 Platform After January 6, 2005
    With respect to a product that is added to the Hybrid 2.0 Platform 
after January 6, 2005, the DPM and e-DPMs appointed to the product 
would be entitled to quote electronically. All MMs quoting in the 
product prior to its addition to the Hybrid 2.0 Platform would be 
entitled to quote electronically provided that: (i) They have 
transacted at least 80% of their MM contracts and transactions in-
person in each of the three immediately preceding calendar months prior 
to the product being added to the Hybrid 2.0 Platform in option 
products traded in the trading station; or (ii) they were physically 
present in the trading station acting in the capacity of a MM on the 
day prior to the product being added to the Hybrid 2.0 Platform. These 
standards, which also are contained in paragraph (a) of this rule, 
would ensure that MMs that maintained a presence in the class prior to 
its conversion to the Hybrid 2.0 Platform would be guaranteed the 
ability to quote electronically upon conversion to Hybrid 2.0. If at 
the time a product is added to the Hybrid 2.0 Platform the aggregate 
number of DPMs, e-DPMs, and MMs entitled to quote electronically in the 
product exceeds the CQL, then the product would have an ``increased 
CQL,'' as described in Interpretations and Policies .01(a). Reduction 
of any ``increased CQL'' would be in accordance with the procedures 
described in Interpretations and Policies .01(a).
    All other members would be entitled to quote electronically in that 
product in the order in which they so request provided the number of 
members quoting electronically in the product does not exceed the CQL. 
When the number of members quoting electronically in the product equals 
the CQL, all other members would be wait-listed in the order in which 
they request the ability to quote electronically. The wait-list would 
operate as described in CBOE Rule 8.3A(a).
Products Added to the Hybrid Trading System After January 6, 2005
    With respect to a new product that commences trading on the Hybrid 
Trading System after January 6, 2005, the assigned DPM would be 
entitled to quote electronically. Thereafter, all other members would 
be entitled to

[[Page 10009]]

quote electronically in that product in the order in which they so 
request provided the number of members quoting electronically does not 
exceed the CQL. When the number of members quoting electronically in 
the product equals the CQL, all other members would be wait-listed in 
the order in which they request the ability to quote electronically. 
The wait-list would operate as described in CBOE Rule 8.3A(a).
Establishing the Class Quoting Limits
    There would not be a uniform CQL for each class traded on the 
Exchange, rather the CQL would vary by product. This section describes 
the process for affixing CQLs for all products.
Products Trading on the Exchange as of January 6, 2005
    The proposed CQL for all products trading on the Hybrid Trading 
System would be twenty-five (25). The twenty-sixth member to request 
the ability to quote electronically in a Hybrid class would be first on 
the wait-list for that product.
    The proposed CQLs for products trading on the Hybrid 2.0 Platform 
would vary based on trading volume over the preceding calendar quarter. 
The proposed CQL would be as follows: 40 for the 20% most actively-
traded products over the preceding quarter; 35 for the next 20% most 
actively-traded products; 30 for the next 20% most actively-traded 
products; and 25 for all other Hybrid 2.0 Platform products.\25\ The 
Exchange selected these levels because they strike the optimum balance 
between the Exchange's need to not exceed its internal quote capacity 
by allowing an unlimited number of quoters in every class and the need 
to provide greater liquidity in the more actively-traded classes.
---------------------------------------------------------------------------

    \25\ See proposed CBOE Rule 8.3A.01.
---------------------------------------------------------------------------

    At the end of each calendar quarter, products would be assigned a 
different CQL based on the revised trading volume statistics (``new 
CQL''). For example, if a product with 25 electronic quoters then 
qualifies (based on increased trading volume) for 35 electronic 
quoters, the CQL increases immediately and those on the wait-list would 
be added (if applicable). Otherwise, time priority governs who would be 
entitled to quote electronically in that class.
    If the number of members quoting electronically in the product on 
the last day of the quarter equals or is less than the new CQL, then 
the previous CQL is reduced immediately to the new CQL.\26\ If the 
number of members quoting electronically in the product on the last day 
of the quarter is greater than the new CQL, then that product would 
have an ``increased'' CQL. The reason for the ``increased'' CQL is to 
avoid having to prevent members from quoting electronically in a 
product in which they are already quoting. In this regard, the 
``increased'' CQL would equal the number of members quoting 
electronically in the product on the last day of the quarter. If a 
member changes his/her appointment and ceases quoting electronically in 
that product, the ``increased'' CQL would decrease by one until such 
time that the number of remaining members quoting electronically in the 
product equals the new CQL.\27\ From that point forward, the number of 
members quoting electronically in the product may not exceed the new 
CQL.
---------------------------------------------------------------------------

    \26\ See proposed CBOE Rule 8.3A.01(i).
    \27\ See proposed CBOE Rule 8.3A.01(ii).
---------------------------------------------------------------------------

    As an example, assume product ABC's existing CQL is 40, the new CQL 
on rebalancing date should be 30, and that 33 members are quoting 
electronically in the product on the last day of the quarter. Rather 
than prevent three members from quoting, the CQL would be increased to 
33. If one of those 33 members ``drops'' the product from his/her 
appointment and thus no longer quotes electronically, the ``increased'' 
CQL would drop to 32. When two others leave, the CQL becomes 30 and the 
first member on the wait-list would be entitled to quote electronically 
when one other member leaves the product.
Products Not Traded on the Exchange as of January 6, 2005
    The proposed CQL for all products newly-listed on the Exchange 
after January 6, 2005 would be 25 until such time that the CQL 
increases in accordance with this Interpretations and Policies .01. In 
this regard, when the product's trading volume increases such that the 
product then qualifies for a higher CQL, it would receive a higher CQL.
Increasing the Class Quoting Limit in Exceptional Circumstances
    CBOE believes that having an established upper limit on the number 
of members that may quote electronically in any given product works 
effectively for the overwhelming vast majority of products traded on 
CBOE. Nevertheless, there are bound to be instances in which the demand 
to quote in a new or existing product greatly exceeds the CQL for that 
product. For example, more than 150 members trade options on the S&P 
500 (``SPX'') index. If the Exchange were to trade SPX options on 
Hybrid, a CQL of 25 would be low. It is for these rare instances that 
the Exchange proposes to adopt a rule to allow for a higher CQL.
    In this regard, when exceptional circumstances warrant, the 
President of the Exchange (or in his absence his designee, who must be 
a Senior Vice President of the Exchange or higher) may increase the CQL 
for an existing or new product. ``Exceptional circumstances'' refers to 
substantial trading volume, whether actual or expected (e.g., in the 
case of a new product or a major news announcement). The Exchange does 
not intend for this discretion (i.e., to increase the CQL) to be 
exercised on an intra-day basis. Rather, the primary instance for which 
the Exchange anticipates this discretion being exercised is for the 
addition of new products to Hybrid or Hybrid 2.0 for where the standard 
CQL is not high enough to accommodate the anticipated trading volume 
and member demand. When the CQL increases pursuant to the President 
exercising his authority in accordance with this paragraph, members on 
the wait-list (if applicable, with respect to a product already trading 
on Hybrid), have first priority and remaining capacity would be filled 
on a time priority basis.\28\
---------------------------------------------------------------------------

    \28\ For new products, proposed CBOE Rule 8.3A(a)-(c) governs.
---------------------------------------------------------------------------

    Upon cessation of the exceptional circumstances, the President (or 
his designee), in his discretion, may determine to reduce the CQL. Any 
reduction in the CQL must be undertaken in accordance with the 
procedure established in paragraph .01(a)(ii) above with respect to 
lowering the ``increased CQL.'' This means that if the new CQL is less 
than the number of members quoting electronically in that product, 
there would be an ``increased'' CQL. Any actions taken by the President 
of the Exchange pursuant to this paragraph (to increase or decrease the 
CQL) would be submitted to the SEC in a rule filing pursuant to Section 
19(b)(3)(A) of the Act.
    The Exchange would announce all changes regarding CQLs to the 
membership via Information Circular. The Exchange may increase the CQL 
levels established in paragraphs .01(a) and (b) by submitting to the 
SEC a rule filing pursuant to Section 19(b)(3)(A) of the Act. The 
Exchange may decrease the CQL levels established above upon SEC 
approval of a rule filing submitted pursuant to Section 19(b)(2) of the 
Act.

[[Page 10010]]

Other Minor Rule Changes
    The Exchange proposes to amend the definition of ``market 
participant'' in CBOE Rule 6.45A to remove the in-person requirement 
from MMs. The Exchange proposes definitions in CBOE Rule 1.1(aaa) for 
the terms ``Hybrid Trading System'' and ``Hybrid 2.0 Program.''
2. Statutory Basis
    The Exchange believes that the proposal, as amended, would enhance 
liquidity on the Exchange. For this reason, the Exchange believes the 
proposed rule change, as amended, 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.\29\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \30\ requirements that the rules 
of an exchange be designed to promote just and equitable principles of 
trade, prevent fraudulent and manipulative acts and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b).
    \30\ 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 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

    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, as amended, 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-2004-58 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-2004-58. 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 the 
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-2004-58 and should be submitted on or before March 22, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-801 Filed 2-28-05; 8:45 am]
BILLING CODE 8010-01-P