[Federal Register Volume 70, Number 130 (Friday, July 8, 2005)]
[Notices]
[Pages 39537-39539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3594]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51938; File No. SR-CBOE-2005-40]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment 
No. 1 Thereto Relating to the Hybrid Opening System

June 29, 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 May 16, 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, II, and III below, which Items have been prepared by the CBOE. 
The CBOE submitted Amendment No. 1 on June 24, 2005.\3\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 revised the rule text to reflect language 
recently approved in another filing.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend its rules relating to the Hybrid 
Opening System (``HOSS'') procedures. The text of the proposed rule 
change is set forth below. Additions are in italics. Deletions are in 
brackets.

CHAPTER VI

Doing Business on the Exchange Floor
Rule 6.2B. Hybrid Opening System (``HOSS'')
    Rule 6.2B. (a) No change.
    (b) After the Opening Notice is sent, the System will calculate and 
provide the Expected Opening Price (``EOP'') and expected opening size 
(``EOS'') given the current resting orders during the EOP Period (``EOP 
Period''). The appropriate FPC will establish the duration of the EOP 
Period on a class basis at between five and sixty seconds. The EOP, 
which will be calculated and disseminated to market participants every 
few seconds, is the price at which the greatest number of orders in the 
Book are expected to trade. After the Opening Notice is sent, quotes 
and orders may be submitted without restriction. An EOP may only be 
calculated if: (i) there are market orders in the Book, or the Book is 
crossed (highest bid is higher than the lowest offer) or locked 
(highest bid equals lowest offer), and (ii) at least one [lsqbb]the 
DPM's[rsqbb] quote [lsqbb](or if there is no DPM appointed to the 
class, at least one quote from either a Market Maker or LMM with an 
appointment in the class)[rsqbb] is present and complies with the legal 
width quote requirements of Rule 8.7(b)(iv).
    (c)-(d) No Change.
    (e) The System will not open a series if one of the following 
conditions is met:
    (i) [lsqbb]In classes in which a DPM has been appointed, 
there[rsqbb] There is no quote present in the series that complies with 
the legal width quote requirements of Rule 8.7(b)(iv) [lsqbb]from the 
DPM for the series. In classes in which no DPM has been appointed, 
there is no quote from

[[Page 39538]]

at least one market-maker or LMM with an appointment in the 
class[rsqbb];
    (ii) The opening price is not within an acceptable range (as 
determined by the appropriate FPC and announced to the membership via 
Regulatory Circular) compared to the [lsqbb]highest[rsqbb] lowest quote 
offer and the [[lsqbb]lowest[rsqbb] highest quote bid [lsqbb](e.g., the 
upper boundary of the acceptable range may be 125% of the highest quote 
offer and the lower boundary may be 75% of the lowest quote 
bid)[rsqbb]; or
    (iii) No Change.
    (f)-(i) 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, 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.

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

1. Purpose
    The Exchange is proposing to amend its rules relating to HOSS 
procedures. HOSS is the Exchange's automated system for initiating 
trading at the beginning of each trading day. For each class of options 
contracts approved for trading, the appointed designated primary market 
maker (``DPM'') conducts an opening rotation, which must be held 
promptly following the opening of the underlying security in the 
primary market. For purposes of HOSS, an underlying security shall be 
deemed to have opened in the primary market if such market has (i) 
reported a transaction in the underlying security, or (ii) disseminated 
opening quotations for the underlying security and not given an 
indication of a delayed opening, whichever occurs first.
    Currently, CBOE rules do not allow a Hybrid option series to be 
opened unless the DPM for that option class has submitted a quote that 
complies with the legal quote width requirements of CBOE Rule 
8.7(b)(v),\4\ regardless of whether other market participants have 
timely submitted legal opening quotes.\5\ In an effort to better ensure 
that all options series are promptly opened on CBOE, the Exchange is 
proposing to allow HOSS to open an option series as long as any market 
participant,\6\ not just the DPM, has submitted an opening quote that 
complies with the legal width quote requirements. It should be noted 
that, under the proposal, even though HOSS can open a series without a 
DPM's quote, DPMs, as well as electronic DPMs (``e-DPMs''), remain 
obligated under CBOE rules to timely submit opening quotes.\7\
---------------------------------------------------------------------------

    \4\ See CBOE Rules 6.2B(b) and (e).
    \5\ Other factors must also be satisfied. The opening price for 
the series must be within an acceptable range and the opening trade 
cannot create a market order imbalance. See CBOE Rule 6.2B(e)(ii) 
and (iii).
    \6\ This includes a quote from a DPM, e-DPM, market maker, or a 
remote market maker. See CBOE Rule 6.45A.
    \7\ See Securities Exchange Act Release No. 51670 (May 9, 2005), 
70 FR 28338 (May 18, 2005) (order approving SR-CBOE-2005-027, which 
requires e-DPMs to submit opening quotes in 100% of the series in 
all of their respective allocated option classes).
---------------------------------------------------------------------------

    Finally, this rule change proposes to clarify one of the conditions 
necessary for opening a series. Current CBOE Rule 6.2B(e)(ii) provides 
that, in order for the Hybrid System to open a series, the opening 
price must be within an acceptable range (as determined from time to 
time by the appropriate Exchange floor procedure committee) compared 
with the highest quote offer and the lowest quote bid. The Exchange 
proposes to change the method for determining the acceptable range to 
use the highest bid and the lowest offer, which could provide for an 
even tighter opening price range. In addition, the example provided in 
the same rule would be eliminated.
2. Statutory Basis
    By allowing more participants' quotes to be included in the opening 
process, the Exchange is increasing the likelihood that any particular 
option series will open, and, as such, the Exchange believes this 
proposed rule change, as amended, is consistent with Section 6(b) of 
the Act \8\ in general, and further the objectives of Section 6(b)(5) 
in particular,\9\ in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public interest.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change, as amended, does not impose any burden 
on competition that is 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

    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

    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 CBOE 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-2005-40 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 Number SR-CBOE-2005-40. 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

[[Page 39539]]

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. 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-2005-40 and should be 
submitted by July 29, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3594 Filed 7-7-05; 8:45 am]
BILLING CODE 8010-01-P