[Federal Register Volume 70, Number 237 (Monday, December 12, 2005)]
[Notices]
[Pages 73492-73495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-7192]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52888; File No. SR-CBOE-2005-83]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
the SizeQuote Mechanism

December 5, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 11, 2005, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities 
and Exchange Commission

[[Page 73493]]

(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to modify its pilot SizeQuote Mechanism for the 
execution of large-sized orders in open outcry to make clear that Floor 
Brokers (``FBs'') may facilitate such orders with firm facilitation 
orders and/or solicited orders. The Exchange is also proposing to 
correct the text of the pilot rule in order to capitalize the phrase 
``SizeQuote Order'' for consistency throughout the text. This change is 
merely a non-substantive, typographical correction. No other changes to 
the pilot are being requested at this time. The text of the proposed 
rule change is below. Proposed additions are italicized; proposed 
deletions are in brackets.

Chicago Board Options Exchange, Incorporated

Rules
* * * * *
Rule 6.74 ``Crossing'' Orders
    RULE 6.74. (a)-(e) No change.
(f) Open Outcry ``SizeQuote'' Mechanism
    (i) SizeQuotes Generally: The SizeQuote Mechanism is a process by 
which a floor broker (``FB'') may execute and facilitate large-sized 
orders in open outcry. Floor brokers must be willing to facilitate the 
entire size of the order for which they request SizeQuotes (the 
``SizeQuote Order'') or to execute it against one or more solicited 
orders, or against a combination of solicited and facilitation orders. 
The appropriate Market Performance Committee shall determine the 
classes in which the SizeQuote Mechanism shall apply. The SizeQuote 
Mechanism will operate as a pilot program which expires February 15, 
2006.
    (A) Eligible Order Size: The appropriate MPC shall establish the 
eligible order size however such size shall not be less than 250 
contracts.
    (B) In-crowd Market Participants: The term ``in-crowd market 
participants'' (``ICMPs'') shall be as defined in CBOE Rule 6.45A.
    (C) Public Customer Priority: Public customer orders in the 
electronic book have priority to trade with a SizeQuote [o]Order over 
any ICMP providing a SizeQuote response at the same price as the order 
in the electronic book.
    (D) DPM Participation Rights: The DPM participation entitlement 
shall not apply to SizeQuote transactions.
    (E) FBs may not execute a SizeQuote [o]Order at a price inferior to 
the national best bid or offer (``NBBO''). Unless a SizeQuote request 
is properly canceled in accordance with paragraph (iv), a FB is 
obligated to execute the entire SizeQuote [o]Order at a price that is 
not inferior to the NBBO in situations where there are no SizeQuote 
responses received or where such responses are inferior to the NBBO.
    (ii) SizeQuote Procedure: Upon request by a FB for a SizeQuote, 
ICMPs may respond with indications of the price and size at which they 
would be willing to trade with a SizeQuote [o]Order. After the 
conclusion of time during which interested ICMPs have been given the 
opportunity to provide their indications, the FB must execute the 
SizeQuote [o]Order with ICMPs and/or with a firm facilitation order 
and/or solicited order(s) in accordance with the following procedures:
    (A) Executing the Order at ICMP's Best Price: ICMPs that provided 
SizeQuote responses at the highest bid or lowest offer (``best price'') 
have priority to trade with the SizeQuote Order at that best price. 
Allocation of the order among ICMPs shall be pro rata, up to the size 
of each ICMP's SizeQuote response. The FB must trade at the best price 
any contracts remaining in the original SizeQuote Order that were not 
executed by ICMPs providing SizeQuote responses.
    (B) Executing the Order at a Price that Improves upon ICMP's Price 
by One Minimum Increment: ICMPs that provided SizeQuote responses at 
the best price (``eligible ICMPs'') have priority to trade with the 
SizeQuote Order at a price equal to one trading increment better than 
the best price (``improved best price''). Allocation of the order among 
eligible ICMPs at the improved best price shall be pro rata, up to the 
size of each eligible ICMP's SizeQuote response. The FB must trade at 
the improved best price any contracts remaining in the original 
SizeQuote Order that were not executed by eligible ICMPs.
    (C) Trading at a Price that Improves upon ICMP's Price by More than 
One Minimum Increment: A FB may execute the entire SizeQuote [o]Order 
at a price two trading increments better than the best price 
communicated by the ICMPs in their responses to the SizeQuote request.
    (iii) Definition of Trading Increments: Permissible trading 
increments are $0.05 for options quoted below $3.00 and $0.10 for all 
others. In classes in which bid-ask relief is granted pursuant to CBOE 
Rule 8.7(b)(iv), the permissible trading increments shall also increase 
by the corresponding amount. For example, if a series trading above 
$3.00 has double-width bid-ask relief, the permissible trading 
increment for purposes of this rule shall be $0.20.
    (iv) It will be a violation of a FB's duty of best execution to its 
customer if it were to cancel a SizeQuote [o]Order to avoid execution 
of the order at a better price. The availability of the SizeQuote 
Mechanism does not alter a FB's best execution duty to get the best 
price for its customer. A SizeQuote request can be canceled prior to 
the receipt by the FB of responses to the SizeQuote request. Once the 
FB receives a response to the SizeQuote request, if he or she were to 
cancel the order and then subsequently attempt to execute the order at 
an inferior price to the previous SizeQuote response, there would be a 
presumption that the FB did so to avoid execution of its customer order 
in whole or in part by others at the better price.
* * * * *

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 those statements may be examined at the places specified in 
Item IV 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
    CBOE Rule 6.74(f), which relates to the open outcry ``SizeQuote'' 
Mechanism, was approved on a pilot basis in February 2005 and will 
expire in February 2006.\3\ This pilot rule provides a process by which 
a FB, using his or her exercise of due diligence to execute orders at 
the best price(s), may execute and facilitate large-sized orders in 
open outcry. For purposes of the pilot

[[Page 73494]]

rule, the minimum qualifying order size is 250 contracts \4\ and FBs 
must stand ready to facilitate the entire size of the order for which 
they request SizeQuotes (referred to as the ``SizeQuote Order''). The 
SizeQuote procedure currently works in the following manner:
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    \3\ See Securities Exchange Act Release No. 51205 (February 15, 
2005), 70 FR 8647 (February 22, 2005) (approving SR-CBOE-2004-72 on 
a pilot basis through February 15, 2006).
    \4\ The appropriate Exchange committee determines the classes in 
which SizeQuote operates and may vary the minimum qualifying order 
size, provided that such number may not be less than 250 contracts.
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     A FB holding an order for at least 250 contracts must 
specifically request a SizeQuote from in-crowd market participants 
(``ICMPs'').\5\ Upon such a request by a FB, ICMPs may respond with 
indications of the price and size at which they would be willing to 
trade with a SizeQuote Order. ICMPs may respond with any size and price 
they desire (subject to the rules governing the current market maker 
obligation requirements) and as such are not obligated to respond with 
a size of at least 250 contracts.\6\ The rule provides that FBs may not 
execute a SizeQuote Order at a price inferior to the national best bid 
or offer (``NBBO''). Paragraph (f)(i)(E) clarifies that unless a 
SizeQuote request is properly canceled in accordance with paragraph 
(iv), a FB is obligated to execute the entire SizeQuote Order at a 
price that is not inferior to the NBBO in situations where there are no 
SizeQuote responses received or where such responses are inferior to 
the NBBO.
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    \5\ Pursuant to CBOE Rule 6.45A, ``Priority and Allocation of 
Trades on the CBOE Hybrid System,'' in-crowd market participant 
includes an in-crowd Market-Maker, an in-crowd DPM, and a floor 
broker representing orders in the trading crowd.
    \6\ CBOE Rule 8.7(d), ``Market Making Obligations in Applicable 
Hybrid Classes,'' requires Market-Makers to respond to any request 
by a FB for a market with a legal-width (as defined in CBOE Rule 
8.7(b)(iv)), 10-contract minimum size quote in classes trading on 
the CBOE Hybrid System.
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     After the conclusion of the time during which interested 
ICMPs have been given the opportunity to provide their indications, the 
FB will execute the SizeQuote Order he or she is holding with ICMPs or 
with a facilitation order, or both, in accordance with procedures 
specified in the rule, which vary depending upon whether the SizeQuote 
Order is being executed at the ICMP's best price,\7\ at a price that 
improves upon the ICMP's price by one minimum increment,\8\ or at a 
price that improves upon the ICMP's best price by more than one minimum 
increment.\9\
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    \7\ ICMPs that provided SizeQuote responses at the highest bid 
or lowest offer (``best price'') have priority to trade with the 
SizeQuote Order at that best price. For example, assume a FB 
requests a SizeQuote and ICMPs respond with a market quote of 
$1.00--1.20 for 1,000 contracts. This quote constitutes the ``best 
price'' and those ICMPs that responded have priority at those 
prices. If the FB chooses to trade at either of those prices, the 
SizeQuote order will be allocated pro-rata to those ICMPs that 
responded with a quote at the best price, up to the size of their 
respective quotes. If in the above example the SizeQuote order is 
for more than 1,000 contracts, the FB must trade the balance with a 
facilitation order at the best price. ICMPs that did not respond to 
the SizeQuote response would not be eligible to participate in the 
allocation of this trade.
    \8\ ICMPs that provided SizeQuote responses at the best price 
(``eligible ICMPs'') have priority to trade with the SizeQuote Order 
at a price equal to one minimum increment better than the best price 
(``improved best price''). Minimum increments are governed by CBOE 
Rule 6.42, ``Minimum Increments for Bids and Offers.'' The term 
``minimum increment'' is synonymous with ``trading increment.'' 
Accordingly, using the example above, eligible ICMPs, if they 
desire, have priority at prices of $1.05 and $1.15 of up to 1,000 
contracts. If the FB chooses to trade at either of those prices, the 
SizeQuote order will be allocated pro-rata at the improved best 
price to those eligible ICMPs that responded with a quote at the 
best price, up to the size of their respective quotes. If the 
SizeQuote order is for more than 1,000 contracts, the FB must trade 
the balance with a facilitation order at the improved best price. 
ICMPs that did not respond to the SizeQuote response would not be 
eligible to participate in the allocation of this trade.
    \9\ A FB may execute the entire SizeQuote Order with a 
facilitation order at a price two minimum increments better than the 
best price communicated by the ICMPs in their responses to the 
SizeQuote request. Using the example in note 7 above, a FB could 
trade the SizeQuote order with a facilitation order at $1.10. ICMPs 
would not be able to participate in the trade at that price.
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     The Rule also provides that it will be a violation of a 
FB's duty of best execution to its customer if it were to cancel a 
SizeQuote Order to avoid execution of the order at a better price. The 
availability of the SizeQuote Mechanism does not alter a FB's best 
execution duty to get the best price for its customer. A SizeQuote 
request can be canceled prior to the receipt by the FB of responses to 
the SizeQuote request. Once the FB receives a response to the SizeQuote 
request, if he or she were to cancel the order and then subsequently 
attempt to execute the order at an inferior price to the previous 
SizeQuote response, there would be a presumption that the FB did so to 
avoid execution of its customer order in whole or in part by others at 
the better price.
    CBOE is now proposing to modify the pilot program to enable a FB to 
execute a SizeQuote Order with either a firm facilitation order, one or 
more solicited orders, or a combination of the FB's facilitation order 
and such solicited order(s). CBOE believes that making this change to 
the pilot rule is consistent with existing Exchange rules that enable 
members to facilitate large customer orders by crossing them with 
orders for firm accounts or orders solicited from other sources.\10\ 
The procedures for executing a SizeQuote Order will remain unchanged 
under Rule 6.74(f), as amended, and solicited orders will be treated as 
facilitated orders in all respects for purposes of the operation of the 
SizeQuote Mechanism algorithm.
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    \10\ See Securities Exchange Act Release No. 22273 (July 29, 
1985), 50 FR 31449 (August 2, 1985) (SR-CBOE-85-23) (order approving 
a proposed change to CBOE Rules 6.74 and 6.53 to expand the 
provisions governing facilitations to allow for the crossing of a 
public customer order with a ``facilitation'' order solicited from 
another source).
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    The Exchange believes it is reasonable to modify the pilot program 
in order to clarify that it includes solicited orders. The revisions, 
in pertinent part, benefit FB customers by expanding the number of 
potential ``facilitations'' (and thus enable customers to receive 
executions on orders that may not have been otherwise executable) and 
benefit members by allowing them to facilitate customer orders in 
crossing transactions without exposing their own capital to market 
risk, while at the same time maintaining the existing in-crowd market 
participation opportunities through the auction market.
    Finally, the Exchange is also proposing to correct the text of the 
pilot rule in order to capitalize the phrase ``SizeQuote Order'' for 
consistency throughout the text. This change is merely a non-
substantive, typographical correction.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\11\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\12\ in particular, in that it is designed 
to 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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

    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

[[Page 73495]]

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 self-regulatory organization 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 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-2005-83 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-2005-83. 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-2005-83 and should be submitted on or before 
January 3, 2006.

    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. E5-7192 Filed 12-9-05; 8:45 am]
BILLING CODE 8010-01-P