[Federal Register Volume 70, Number 171 (Tuesday, September 6, 2005)]
[Notices]
[Page 53035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4831]



[[Page 53035]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52348; File No. SR-CBOE-2005-57]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving a Proposed Rule Change Relating to the 80/20 Test 
of the Plan for the Purpose of Creating and Operating an Intermarket 
Option Linkage

August 26, 2005.

I. Introduction

    On July 19, 2005, the Chicago Board Options Exchange, Incorporation 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change seeking to modify the 80/20 Test 
in determining limitations on Principal Order \3\ access under the 
rules imposed by Plan for the Purpose of Creating and Operating an 
Intermarket Option Linkage (``Linkage Plan'') \4\ and related rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\A Principal Order is an order for the account of an Eligible 
Market-Maker that does not relate to a customer order the Market-
Maker is holding. See Exchange Rule 6.80(12)(ii).
    \4\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by Amex, Chicago Board 
Options Exchange, Inc., and International Securities Exchange, Inc. 
See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000). Subsequently, Philadelphia Stock Exchange, 
Inc., Pacific Exchange, and Boston Stock Exchange, Inc. joined the 
Linkage Plan. See Securities Exchange Act Release Nos. 43573 
(November 16, 2000), 65 FR 70851 (November 28, 2000); 43574 
(November 16, 2000), 65 FR 70850 (November 28, 2000); and 49198 
(February 5, 2004), 69 FR 7029 (February 12, 2004).
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    The proposed rule change was noticed for comment in the Federal 
Register on July 27, 2005.\5\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
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    \5\ See Securities Exchange Act Release No. 52068 (July 20, 
2005), 70 FR 43473.
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    The purpose of the proposed rule change is to modify the 80/20 Test 
contained in Exchange Rule 6.85. The Rule provides that Market-Makers 
should send Principal Orders through the Linkage on a limited basis and 
not as a primary aspect of their business. The Test implements this 
general principle by prohibiting a Market-Maker from sending Principal 
Orders in an eligible option class if, in the last calendar quarter, 
the Market-Maker's Principal Order contract volume is disproportionate 
to the Market-Maker's contract volume executed against customer orders 
in its own market.
    The Exchange believes that applying the Test has resulted in 
anomalies for Market-Makers with limited volume in an eligible option 
class. Specifically, if a Market-Maker has very little overall trading 
volume in an option, the execution of one or two Principal Orders 
during a calendar quarter could result in the Market-Maker failing to 
meet the Test. This would bar the Market-Maker from using the Linkage 
to send Principal Orders in that options class for the following 
calendar quarter. The Exchange believes that it was not the intent of 
the Participants to the Linkage Plan to bar Market-Makers with limited 
volume from sending Principal Orders through the Linkage in these 
circumstances since such trading clearly was not ``a primary aspect of 
their business.'' Thus, the proposed rule change proposes to create a 
de minimis exemption from the 80/20 Test for Market-Makers that have 
total contract volume of less than 1,000 contracts in an options class 
for a calendar quarter.

II. Discussion

    After careful review, 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.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act \7\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
to protect investors and the public interest. The Commission believes 
that the proposed rule change will increase the availability of Linkage 
to members of the Participants by limiting the applicability of the 80/
20 Test in situations where market makers have minimal trading volume 
in a particular options class.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that the Exchange does not believe that 
it is necessary to bar market makers with limited volume from sending 
Principal Orders through the Linkage, as such trading does not raise 
concerns that a member is sending such orders as ``a primary aspect of 
their business.'' The Commission believes that the de minimis exemption 
from the 80/20 Test proposed by the Exchange for market makers that 
have a total contract volume of less than 1,000 contracts in an options 
class for a calendar quarter should ensure that specialists and ROTs 
with relatively low volume in a particular options class can send a 
reasonable number of Principal Orders without being barred from using 
the Linkage by application of the 80/20 Test in the following calendar 
quarter.

III. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-2005-57) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4831 Filed 9-2-05; 8:45 am]
BILLING CODE 8010-01-P