[Federal Register Volume 70, Number 160 (Friday, August 19, 2005)]
[Notices]
[Pages 48787-48789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4532]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52256; File No. SR-CBOE-2005-56]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
to Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend 
CBOE Rule 8.7 To Extend for an Additional Six Months Its Pilot Program 
Pertaining to Market-Maker Quote Sizes

August 15, 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 July 15, 2005, 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 and II below, which Items have been prepared by 
the Exchange. On July 29, 2005, CBOE submitted Amendment No. 1 to the 
proposed rule change.\3\ On August 10, 2005, CBOE submitted 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 and to approve the proposal on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, CBOE replaced the original rule filing 
in its entirety.
    \4\ In Amendment No. 2, CBOE revised the text of the proposed 
rule change to be consistent with its current rule in order to 
accurately reflect the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE Rule 8.7 to extend for an additional 
six months its pilot program pertaining to market-maker quote sizes. 
The text of the proposed rule change is available on CBOE's Web site at 
http://www.CBOE.com, at 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

[[Page 48788]]

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 the 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    On August 17, 2004, the Commission approved, on a one-year pilot 
basis, an exception to CBOE Rule 8.7, pertaining to the general quoting 
obligations of Market-Makers in option classes traded on CBOE's Hybrid 
Trading System (``Pilot Program'').\5\ The Pilot Program allows Market-
Makers to submit an undecremented electronic quotation of a size as low 
as 1-contract (``1-up'') when the underlying primary market for the 
option disseminates a 1-up market (i.e., a market that reflects a 
quotation for 100 shares of the underlying security). The ability to 
quote 1-up is expressly conditioned on the process being automated; in 
other words, a Market-Maker may not manually adjust his quotes to 
reflect a 1-up size quote.
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    \5\ See Securities Exchange Act Release No. 50205 (August 17, 
2004), 69 FR 51869 (August 23, 2004) (approving SR-CBOE-2003-39).
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    CBOE believes that the Pilot Program has been effective in serving 
the original purpose of the rule filing. Specifically, the purpose of 
the Pilot Program was to address the fact that Market-Makers may be 
subject to heightened and possibly inappropriate levels of risk due to 
their obligation to maintain electronic two-sided quotes for at least 
10-contracts, whereas there is no restriction on the stock specialist's 
ability to disseminate a 1-up market. Additionally, when the underlying 
market disseminates a 1-up quote, it substantially restricts the amount 
of liquidity available in that security to 100 shares on that 
particular side of the market, which limits a Market-Maker's ability to 
hedge his/her positions and increases his/her financial exposure.
    CBOE requests that the Pilot Program be extended for an additional 
six months, until February 17, 2006, to allow CBOE time to further 
consider whether this Pilot Program is a useful tool for Market-Makers 
to manage their risks when the underlying primary market quotes 1-up. 
This additional time would also provide Market-Makers with the 
opportunity to modify their systems to quote 1-up on an automated 
basis.
(2) Statutory Basis
    The Exchange believes that the proposed rule change 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.\6\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \7\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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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 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

    The Exchange neither received or solicited written comments on the 
proposal.

III. 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-2005-56 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-2005-56. 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. Copies of such filing also will be 
available for inspection and copying at the principal office of 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-2005-56 
and should be submitted on or before September 9, 2005.

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

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\8\ 
In particular, the Commission believes that the proposal is consistent 
with Section 6(b)(5) of the Act,\9\ which requires that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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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    \8\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that extending the Pilot Program for an 
additional six months is necessary to provide the Commission with 
adequate information to evaluate the effect of the Pilot Program. The 
Commission notes that in approving the Pilot Program, it requested a 
report from CBOE based on ten months of data during the first year of 
the Pilot Program, to be due two months prior to expiration of the 
Pilot Program. The Commission received a letter from CBOE approximately 
one month prior to the end of the Pilot

[[Page 48789]]

Program. The letter from CBOE, which was based on a very limited 
analysis of the program, stated that in its opinion, the Pilot Program 
did not have any impact on CBOE's best quote and size of best quote or 
the quality of the CBOE market. CBOE stated in the letter that it 
believed that additional Market-Makers would utilize the Pilot Program 
if given more time to make the required systems changes.
    Should the Exchange decide to propose to extend, or to obtain 
permanent approval of, the Pilot Program, the Commission expects to 
receive a more comprehensive analysis of the entire Pilot Program two 
months prior to the expiration of this six-month extension, so that the 
Commission may evaluate the effectiveness of the Pilot Program.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\10\ for approving the proposed rule change, as amended, prior 
to the thirtieth day after the publication of notice thereof in the 
Federal Register. The Pilot Program is set to expire on August 17, 
2005, and as such, to allow the Pilot Program to continue to operate 
pursuant to proper authority, the Commission believes it is appropriate 
to accelerate approval. Accordingly, the Commission finds that good 
cause exists, consistent with Section 6(b)(5) of the Act,\11\ to 
approve the proposal on an accelerated basis.
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change, as amended (SR-CBOE-2005-56), 
is hereby approved on an accelerated basis on a pilot basis, scheduled 
to expire on February 17, 2006.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-4532 Filed 8-18-05; 8:45 am]
BILLING CODE 8010-01-P