[Federal Register Volume 70, Number 132 (Tuesday, July 12, 2005)]
[Notices]
[Pages 40084-40086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3666]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51969; File No. SR-CBOE-2005-44]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Amending Obvious Error Rules

July 5, 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 14, 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 CBOE. The Exchange 
filed the proposed rule change as a ``non-controversial'' rule change 
under Rule 19b-4(f)(6) under the Act,\3\ which renders the proposal 
effective upon filing with the Commission. 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to revise its obvious error rules for equity and 
index options. Below is the text of the proposed rule change. Proposed 
deletions are in [brackets].
* * * * *

Chicago Board Options Exchange, Incorporated

* * * * *

Rule 6.25 Nullification and Adjustment of Equity Option Transactions

    This Rule governs the nullification and adjustment of transactions 
involving equity options. Rule 24.16 governs the nullification and 
adjustment of transactions involving index options and options on ETFs 
and HOLDRs. Paragraphs (a)(1), and (2) of this Rule have no 
applicability to trades executed in open outcry.
    (a) Trades Subject to Review
    A member or person associated with a member may have a trade 
adjusted or nullified if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) No change
    (2) No Bid Series: Electronic transactions in series quoted no bid 
[at a nickel (i.e., $0.05 offer)] will be nullified provided at least 
one strike price below (for calls) or above (for puts) in the same 
options class was quoted no bid [at a nickel] at the time of execution.
    (3)-(5) No change
    (b)-(e) No change
* * * * *

Rule 24.16 Nullification and Adjustment of Index Option Transactions

    This Rule only governs the nullification and adjustment of 
transactions involving index options and options on ETFs or HLDRs. Rule 
6.25 governs the nullification and adjustment of transactions involving 
equity options. Paragraphs (a)(1), (2), (6) and (7) of this Rule have 
no applicability to trades executed in open outcry.
    (a) Trades Subject to Review
    A member or person associated with a member may have a trade 
adjusted or nullified if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1)-(6) No change
    (7) No Bid Series: Electronic transactions in series quoted no bid 
[at a nickel (i.e., $0.05 offer)] will be nullified provided at least 
one strike price below (for calls) or above (for puts) in the same 
options class was quoted no bid [at a nickel] at the time of execution.
    (b)-(e) 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 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, Proposed Rule Change

1. Purpose
    The CBOE proposes to revise its obvious error rules with respect to

[[Page 40085]]

equities and indexes (CBOE Rules 6.25 and 24.16, respectively) 
(``Obvious Error Rules'') to adjust the terms that relate to the 
nullification of no bid series as set forth in CBOE Rules 6.25(a)(2) 
and 24.16(a)(7) (together ``No Bid Provisions'').
    Under the current No Bid Provisions, electronic transactions in 
option series quoted no bid at a nickel (i.e., $0.05 offer) are 
nullified provided at least one strike price below (for calls) or above 
(for puts) in the same options class is quoted no bid at a nickel at 
the time of execution. A ``no bid'' option refers to an option where 
the bid price is $0.00.\4\ Series of options quoted no bid are usually 
deep out-of-the-money series that are perceived as having little if any 
chance of expiring in-the-money.\5\ For this reason, relatively few 
transactions occur in these series, and those that do are usually the 
result of a momentary pricing error. In some cases, the pricing error 
is substantial enough such that other provisions in the Obvious Error 
Rules become applicable. The Exchange asserts that in many cases 
though, the No Bid Provisions are the only provisions that would apply 
to the pricing error.
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    \4\ When the bid price is $0.00, the offer price is typically 
$0.05. In this instance, the option typically is referred to as ``no 
bid at a nickel.''
    \5\ For example, on July 11th with the underlying stock trading 
at $21, the JULY 40 calls likely will be quoted no-bid at a nickel.
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    The proposed rule change would remove the condition set forth in 
the No Bid Provisions that provides that the option series must be 
offered at a nickel and instead only require that the option series be 
quoted no bid. The Exchange states that the reason for this change is 
that options that are priced at no bid, regardless of the offer, are 
usually deep out-of-the-money series that are perceived as having 
little if any chance of expiring in-the-money. This is especially the 
case when the series below (for calls) or above (for puts) in the same 
option class similarly is quoted no bid. In this regard, the offer 
price is irrelevant. Therefore, transactions that are no bid at a dime, 
for example, are just as likely to be the result of an obvious error as 
are transactions that are no bid at a nickel when the series below (for 
calls) or above (for puts) in the same option class similarly is quoted 
no bid. The Exchange also notes that the text of the No Bid Provisions, 
as proposed, is substantively identical to Rule 1092(c)(ii)(E) of the 
Philadelphia Stock Exchange (``Phlx'') Rulebook, which applies to 
options on stocks, exchange-traded fund shares, and foreign currencies.
2. Statutory Basis
    The CBOE believes that the filing provides for the nullification of 
certain trades that result from an inaccurate pricing anomaly. For this 
reason, and because the same provision has already been approved for 
the Phlx,\6\ the Exchange believes that its proposal is consistent with 
Section 6(b) of the Act \7\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \8\ in particular, in that it is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and national market 
system and, in general, to protect investors and the public interest.
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    \6\ See Securities Exchange Act Release No. 49785 (May 28, 
2004), 69 FR 32090 (June 8, 2004) (Order approving adoption of Phlx 
Rule 1092(c)(ii)(E)).
    \7\ 15 U.S.C. 78f(b).
    \8\ 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 inappropriate 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 CBOE neither solicited nor received written comments on the 
proposed rule change.

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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) by its terms, 
does not become operative for 30 days after the date of 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 
\9\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\10\ As required 
under Rule 19b-4(f)(6)(iii),\11\ 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 the filing of the 
proposed rule change.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\12\ 
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. In addition, the Exchange has 
requested that the Commission waive the 30-day operative delay and 
render the proposed rule change to become operative immediately. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Waiver of the 30-day operative delay would enable the Exchange to 
implement the proposal as quickly as possible. In addition, the 
Commission notes that the proposed No Bid Provisions are substantially 
identical to Phlx Rule 1092(c)(ii)(E). The Commission does not believe 
that the proposed rule change raises new regulatory issues. For the 
reasons stated above, the Commission designates the proposal to become 
operative immediately.\14\
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    \12\ Id.
    \13\ Id.
    \14\ For purposes of waiving the operative date of this proposal 
only, the Commission has considered the impact of the proposed rule 
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 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 the 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-2005-44 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9309.

[[Page 40086]]

    All submissions should refer to File Number SR-CBOE-2005-44. 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. 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-2005-44 and should be submitted on or before August 
2, 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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3666 Filed 7-11-05; 8:45 am]
BILLING CODE 8010-01-P