[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35476-35479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3163]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51824; File No. SR-CBOE-2005-45]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Modify the Designated Primary Market-Maker 
Participation Entitlement for Orders Specifying a Preferred DPM

June 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 June 6, 2005, the Chicago Board Options Exchange, Incorporated 
(``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 CBOE. The 
CBOE filed the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ 
and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission.\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\ The Exchange provided the Commission with written notice of 
its intention to file the proposed rule change on June 3, 2005. The 
Exchange has requested that the Commission waive the 30-day 
operative delay. 17 CFR 240.19b-4(f)(6)(iii).

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[[Page 35477]]

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

    The CBOE proposes to modify the Designated Primary Market-Maker 
(``DPM'') participation entitlement for orders specifying a Preferred 
DPM. Proposed new language is in italics; proposed deletions are in 
[brackets].

Rule 8.87 Participation Entitlements of DPMs and e-DPMs

    (a) Subject to the review of the Board of Directors, the MTS 
Committee may establish from time to time a participation entitlement 
formula that is applicable to all DPMs.
    (b) The participation entitlement for DPMs and e-DPMs (as defined 
in Rule 8.92) shall operate as follows:
    (1) Generally.
    (i) To be entitled to a participation entitlement, the DPM/e-DPM 
must be quoting at the best bid/offer on the Exchange.
    (ii) A DPM/e-DPM may not be allocated a total quantity greater than 
the quantity that the DPM/e-DPM is quoting at the best bid/offer on the 
Exchange.
    (iii) The participation entitlement is based on the number of 
contracts remaining after all public customer orders in the book at the 
best bid/offer on the Exchange have been satisfied.
    (2) Participation Rates applicable to DPM Complex. The collective 
DPM/e-DPM participation entitlement shall be: 50% when there is one 
Market-Maker also quoting at the best bid/offer on the Exchange; 40% 
when there are two Market-Makers also quoting at the best bid/offer on 
the Exchange; and, 30% when there are three or more Market-Makers also 
quoting at the best bid/offer on the Exchange.
    (3) Allocation of Participation Entitlement Between DPMs and e-
DPMs. The participation entitlement shall be as follows: If the DPM and 
one or more e-DPMs are quoting at the best bid/offer on the Exchange, 
the e-DPM participation entitlement shall be one-half (50%) of the 
total DPM/e-DPM entitlement and shall be divided equally by the number 
of e-DPMs quoting at the best bid/offer on the Exchange. The remaining 
half shall be allocated to the DPM. If the DPM is not quoting at the 
best bid/offer on the Exchange and one or more e-DPMs are quoting at 
the best bid/offer on the Exchange, then the e-DPMs shall be allocated 
the entire participation entitlement (divided equally between them). If 
no e-DPMs are quoting at the best bid/offer on the Exchange and the DPM 
is quoting at the best bid/offer on the Exchange, then the DPM shall be 
allocated the entire participation entitlement. If only the DPM and/or 
e-DPMs are quoting at the best bid/offer on the Exchange (with no 
Market-Makers at that price), the participation entitlement shall not 
be applicable and the allocation procedures under Rule 6.45A shall 
apply.
    (4) Allocation of Participation Entitlement Between DPMs and e-DPMs 
for Orders Specifying a Preferred DPM. Notwithstanding the provisions 
of subparagraph (b)(3) above, the Exchange may allow, on a class-by-
class basis, for the receipt of marketable orders, through the 
Exchange's Order Routing System when the Exchange's disseminated quote 
is the NBBO, that carry a designation from the member transmitting the 
order that specifies a DPM or e-DPM in that class as the ``Preferred 
DPM'' for that order. In such cases and after the provisions of 
subparagraph (b)(1)(i) and (iii) above have been met, then the 
Preferred DPM participation entitlement shall be 50% when there is one 
Market-Maker also quoting at the best bid/offer on the Exchange; 40% 
when there are two Market-Makers also quoting at the best bid/offer on 
the Exchange; and, 30% when there are three or more Market-Makers also 
quoting at the best bid/offer on the Exchange, [participation 
entitlement applicable to the DPM Complex (as set forth in subparagraph 
(b)(2) above) shall be allocated to the Preferred DPM] subject to the 
following:
    [(i) if the Preferred DPM is an e-DPM and the DPM is also quoting 
at the best bid/offer on the Exchange, then \2/3\ of the participation 
entitlement shall be allocated to the Preferred DPM and the balance of 
the participation entitlement shall be allocated to the DPM;
    (ii) if the Preferred DPM is an e-DPM and the DPM is not quoting at 
the best bid/offer on the Exchange but one or more e-DPMs are also 
quoting at the best bid/offer on the Exchange, then \2/3\ of the 
participation entitlement shall be allocated to the Preferred DPM and 
the balance of the participation entitlement shall be divided equally 
between the remaining e-DPMs also quoting at the best bid/offer on the 
Exchange;
    (iii) if the Preferred DPM is the DPM and one or more e-DPMs are 
also quoting at the best bid/offer on the Exchange, then \2/3\ of the 
participation entitlement shall be allocated to the Preferred DPM and 
the balance of the participation entitlement shall be divided equally 
between the e-DPMs quoting at the best bid/offer on the Exchange;]
    [(iv)] (i) if the Preferred DPM is not quoting at the best bid/
offer on the Exchange then the participation entitlement set forth in 
subparagraph (b)(3) above shall apply; and
    [(v) if only members of the DPM Complex are quoting at the best 
bid/offer on the Exchange then the participation entitlement applicable 
to the Preferred DPM shall be: 50% when there is one other member of 
the DPM Complex also quoting at the best bid/offer on the Exchange; 40% 
when there are two other members of the DPM Complex quoting at the best 
bid/offer on the Exchange; and, 30% when there are three or more 
members of the DPM Complex also quoting at the best bid/offer on the 
Exchange. The other members of the DPM Complex shall not receive a 
participation entitlement and the allocation procedures under Rule 
6.45A shall apply; and]
    [(vi)] (ii) in no case shall the Preferred DPM [a DPM/e-DPM] be 
allocated, pursuant to this participation right, a total quantity 
greater than the quantity that the Preferred DPM [DPM/e-DPM] is quoting 
at the best bid/offer on the Exchange.
    The Preferred DPM participation entitlement set forth in 
subparagraph (b)(4) of this Rule shall be in effect until June 2, 2006 
on a pilot basis.
* * * Interpretations and Policies
    .01 Notwithstanding subparagraph (b)(2) above, the Exchange may 
establish a lower DPM Complex Participation Rate on a product-by-
product basis for newly-listed products or products that are being 
allocated to a DPM trading crowd for the first time. Notification of 
such lower participation rate shall be provided to members through a 
Regulatory Circular.
* * * * *

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 CBOE 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 CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 35478]]

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

1. Purpose
    CBOE Rule 8.87 governs the participation entitlement of DPMs and e-
DPMs (the ``DPM Complex''). CBOE Rule 8.87(b)(2) states the actual 
participation entitlement percentages applicable to the DPM Complex, 
which are tiered to take into account the number of non-DPM Market-
Makers also quoting at the best price. The participation entitlement 
percentages are as follows: 50% when there is one Market-Maker also 
quoting at the best bid/offer on the Exchange; 40% when there are two 
Market-Makers also quoting at the best bid/offer on the Exchange; and, 
30% when there are three or more Market-Makers also quoting at the best 
bid/ offer on the Exchange.
    The CBOE recently obtained approval of a filing adopting a 
Preferred DPM Program.\6\ Under that program, order providers can send 
an order to the Exchange designating a ``Preferred DPM'' from among the 
DPM Complex. If the Preferred DPM is quoting at the National Best Bid 
or Offer (``NBBO'') at the time the order is received on the CBOE, the 
Preferred DPM is entitled to \2/3\ of the participation entitlement 
described above. The Philadelphia Stock Exchange (``Phlx'') recently 
obtained approval of a directed order program that allows the directed 
order recipient to receive a 40% participation entitlement on 
designated orders received while that entity is quoting at the NBBO.\7\ 
The purpose of this filing is to remain competitive with the Phlx 
directed order program.
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    \6\ See Securities Exchange Act Release No. 51779 (June 2, 2005) 
(order approving SR-CBOE-2004-71).
    \7\ See Securities Exchange Act Release No. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005) (order approving SR-Phlx-2004-91).
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    This proposal increases the participation entitlement applicable to 
Preferred DPMs from \2/3\ of the ``regular'' participation entitlement 
to the entire participation entitlement. Thus, the Preferred DPM 
participation entitlement shall be 50% when there is one Market-Maker 
also quoting at the best bid/offer on the Exchange; 40% when there are 
two Market-Makers also quoting at the best bid/offer on the Exchange; 
and, 30% when there are three or more Market-Makers also quoting at the 
best bid/offer on the Exchange. The proposal does not in any way modify 
the percentage of an order that is available to non-DPM quoters while 
allowing the Exchange's program to be more competitive with the Phlx 
directed order program. The CBOE notes that other exchanges have rules 
that provide specialist entitlements as high as 40% (with three or more 
market-makers also quoting at the same price),\8\ and that the 
Preferred DPM Program is operating as a one-year pilot program.
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    \8\ See Phlx Rule 1014(g)(viii), Pacific Exchange Rule 
6.82(d)(2), and American Stock Exchange Rule 935-ANTE(a)(4).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\9\ in general, and furthers the objectives of 
Section 6(b)(5),\10\ in particular, in that it is 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).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in the 
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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because 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 for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, 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 the 
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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    The CBOE has requested that the Commission waive the 30-day 
operative delay. The Commission believes it is consistent with the 
protection of investors and the public interest for the CBOE to 
implement the proposed rule change without delay. For this reason, the 
Commission designates the proposal to be effective and operative upon 
filing with the Commission.\13\
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    \13\ 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. See 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 No. SR-CBOE-2005-45 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File No. SR-CBOE-2005-45. 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, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the CBOE. All

[[Page 35479]]

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 No. SR-CBOE-2005-45 and should be 
submitted on or before July 11, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3163 Filed 6-17-05; 8:45 am]
BILLING CODE 8010-01-P