[Federal Register Volume 70, Number 137 (Tuesday, July 19, 2005)]
[Notices]
[Pages 41462-41464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3829]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52021; File No. SR-CBOE-2005-50]


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

July 13, 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 29, 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 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. In addition, the 
Commission is granting accelerated approval of the proposed rule 
change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

[[Page 41463]]

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; and 
40% when there are two or more 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], 
subject to the following:
    (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
    (ii) in no case shall the Preferred DPM be allocated, pursuant to 
this participation right, a total quantity greater than the quantity 
that the Preferred 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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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
    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 current 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 (``Program'').\3\ A modification to the 
applicable participation entitlement percentages under the Program was 
also recently effected.\4\ Under the current 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 the entire 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.\5\ 
The International Securities (``ISE'') also recently obtained approval 
to implement a preferencing program that allows a preferenced ISE 
market maker to receive a 40% participation entitlement on designated 
orders received while that market maker is quoting at the NBBO.\6\ 
According to the CBOE, the purpose of this filing is to match the 
participation rate of the Phlx directed order program and the ISE 
preferencing program.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 51779 (June 2, 
2005), 70 FR 33564 (June 8, 2005) (order approving SR-CBOE-2004-71).
    \4\ See Securities Exchange Act Release No. 51824 (June 10, 
2005), 70 FR 35476 (June 20, 2005) (notice of filing and immediate 
effectiveness of File No. SR-CBOE-2005-45).4
    \5\ See Securities Exchange Act Release No. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005) (order approving SR-Phlx-2004-91).
    \6\ See Securities Exchange Act Release No. 51818 (June 10, 
2005), 70 FR 35146 (June 16, 2005) (order approving SR-ISE-2005-18).
---------------------------------------------------------------------------

    In cases in which the Preferred DPM is quoting at the NBBO at the 
time the order is received on the CBOE, this proposal increases the 
participation entitlement for a Preferred DPM to 40% from 30% when 
there are two or more Market-Makers also quoting at the NBBO.\7\ The 
proposal does not modify the participation entitlement for orders that 
do not specify a Preferred DPM. The CBOE notes that the Preferred DPM 
Program is operating on a one-year pilot basis.
---------------------------------------------------------------------------

    \7\ Telephone conversation between John Roeser, Assistant 
Director, David Hsu, Special Counsel, Theodore Venuti, Attorney, 
Division of Market Regulation, Commission, and Angelo Evangelou, 
Senior Managing Attorney, CBOE, on July 6, 2005.
---------------------------------------------------------------------------

2. Statutory Basis
    The CBOE believes the proposed rule change is consistent with 
Section 6(b) of the Act,\8\ in general, and furthers the objectives of 
Section 6(b)(5),\9\ 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.
---------------------------------------------------------------------------

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

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.

[[Page 41464]]

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. 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-2005-50 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 20549-9303.
    All submissions should refer to File Number SR-CBOE-2005-50. 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, 100 F Street, 
NE., 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 publicly available. All 
submissions should refer to File Number SR-CBOE-2005-50 and should be 
submitted on or before August 9, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, 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.\10\ In particular, the Commission believes that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\11\ which 
requires among other things, that the rules of the Exchange are 
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. The Commission notes that the Preferred DPM Program 
currently operates on a one-year pilot basis.\12\ The proposal would 
increase the participation entitlement percentage for a Preferred DPM 
when there are two or more Market-Makers also quoting at the NBBO. 
Because the proposal would not increase the participation entitlement 
beyond the currently acceptable threshold, the Commission does not 
believe that the proposal will negatively impact quote competition on 
the CBOE.\13\ In addition, the Commission notes that it has approved 
similar participation entitlements percentages on other options 
exchanges.\14\
---------------------------------------------------------------------------

    \10\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ See supra note 3. The CBOE subsequently modified the amount 
of the participation entitlement allocable to the Preferred Market-
Maker. See supra note 4.
    \13\ See supra note 5.
    \14\ See supra notes 5 and 6.
---------------------------------------------------------------------------

    The CBOE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
believes that granting accelerated approval of the proposal should 
allow the CBOE to immediately implement the participation entitlement 
percentage for a Preferred DPM similar to the percentage already in 
place on the Phlx and the ISE. Accordingly, the Commission finds good 
cause, pursuant to Section 19(b)(2) of the Act,\15\ for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-CBOE-2005-50) be, and hereby 
is, approved on an accelerated basis.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3829 Filed 7-18-05; 8:45 am]
BILLING CODE 8010-01-P