[Federal Register Volume 71, Number 28 (Friday, February 10, 2006)]
[Notices]
[Pages 7095-7098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-1837]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53229; File No. SR-CBOE-2006-12]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Bid/Ask Differentials in CBOE Rule 8.7

February 6, 2006.
    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 January 31, 2006, 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 Exchange. 
The CBOE has filed this proposal pursuant to Section 19(b)(3)(A)(iii) 
of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission.\5\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The CBOE has asked the Commission to waive the five-day pre-
filing requirement and the 30-day operative delay provided in Rule 
19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 8.7, ``Obligations of Market 
Makers,'' to modify the bid/ask differential rules for options trading 
in open outcry and on the CBOE's Hybrid System (``Hybrid'') and Hybrid 
2.0 Platform (``Hybrid 2.0'').\6\ The text of the proposed rule change 
appears below. Proposed new language is italicized; proposed deletions 
are bracketed.
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    \6\ Hybrid is the CBOE's trading platform that allows individual 
Market Makers to submit electronic quotes in their appointed 
classes. Hybrid 2.0 is an enhanced trading platform that allows 
remote quoting by authorized categories of members. See CBOE Rule 
1.1(aaa).
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Rule 8.7--Obligations of Market-Makers

    Rule 8.7. (a) No change
    (b) Appointment. With respect to each class of option contracts for 
which he holds an Appointment under Rule 8.3, a Market-Maker has a 
continuous obligation to engage, to a reasonable

[[Page 7096]]

degree under the existing circumstances, in dealings for his own 
account when there exists, or it is reasonably anticipated that there 
will exist, a lack of price continuity, a temporary disparity between 
the supply of and demand for a particular option contract, or a 
temporary distortion of the price relationships between option 
contracts of the same class. Without limiting the foregoing, a Market-
Maker is expected to perform the following activities in the course of 
maintaining a fair and orderly market:
    (i)-(iii) No change
    (iv) To price options contracts fairly by, among other things, 
bidding and/or offering in the following manner:
    (A) Bidding and Offering in Open Outcry. With respect to all option 
classes traded on the Exchange, bids and offers made in open outcry 
shall be priced so as to create differences of no more than $0.25 
between the bid and offer for each option contract for which the bid is 
less than $2, no more than $0.40 where the bid is at least $2 but does 
not exceed $5, no more than $0.50 where the bid is more than $5 but 
does not exceed $10, no more than $0.80 where the bid is more than $10 
but does not exceed $20, and no more than $1 where the bid is more than 
$20, provided that the [appropriate Market Performance Committee] 
Exchange may establish differences other than the above for one or more 
options series. The bid/ask differentials stated above shall not apply 
to in-the-money series where the quote width (i) on the primary market 
of the underlying security[ies market], or (ii) calculated by the 
Exchange or its agent for various indices pursuant to Interpretation 
.08 of Rule 8.7, as applicable, is wider than the differentials set 
forth above. For these series, the bid/ask differential may be as wide 
as the quotation on the primary market of the underlying security or 
calculated by the Exchange or its agent for various indices, as 
applicable.
    (B) Opening Rotations. The provisions of Rule 8.7(b)(iv)(A) shall 
apply during the applicable opening rotation employed in Hybrid 
classes, Hybrid 2.0 classes, and Non-Hybrid and Non-Hybrid 2.0 classes.
    ([A]C) Option Classes Trading on the Hybrid Trading System and 
Hybrid 2.0 Platform. Except as provided in subparagraphs (i) and (ii) 
below, [O]option[s] [on] classes trading on the Hybrid Trading 
[s]System and the Hybrid 2.0 Platform may be quoted electronically with 
a difference not to exceed $5 between the bid and offer regardless of 
the price of the bid. [The $5 quote widths shall only apply to classes 
trading on the Hybrid system and only following the opening rotation in 
each security (i.e., the widths specified in paragraph (b)(iv) above 
shall apply during opening rotation).] The provisions of Rule 
8.7(b)(iv)(A) shall apply to any [Q]quotes given in open outcry in 
Hybrid classes and Hybrid 2.0 classes[may not be quoted with $5 widths 
and instead must comply with the legal width requirements (e.g., no 
more than $0.25 between the bid and offer for each option contract for 
which the bid is less than $2) described in paragraph (iv) and not 
subparagraph (iv)(A)].
    i. The $5 bid/ask differential stated in subparagraph (C) above 
shall not apply to in-the-money series where the quote width on the 
primary market of the underlying security, or the quote width 
calculated by the Exchange or its agent for various indices pursuant to 
Interpretation .08, is wider than $5. For these series, the bid/ask 
differential may be as wide as the quote width on the primary market of 
the underlying security or calculated by the Exchange or its agent, as 
applicable; and
    ii. The Exchange may establish quote width differences other than 
as provided in subparagraph (C) for one or more option series.
    (c)-(e) No change.

. . . Interpretations and Policies:

    .01-.13 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 Exchange 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 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
    The CBOE proposes to make a number of changes to its rules relating 
to bid/ask differentials as described below, including reorganizing 
CBOE Rule 8.7(b)(iv) to set forth in separate paragraphs the applicable 
bid/ask differentials in open outcry, during the opening rotation, and 
for option classes trading on Hybrid or Hybrid 2.0.
    CBOE Rule 8.7(b)(iv) establishes maximum bid/ask differentials 
(also referred to as quote spread requirements) for Market Makers that 
vary depending upon the price of the option class and the trading 
platform on which the option class trades (e.g., Hybrid, Non-Hybrid). 
For bids and offers in open outcry, the allowable bid/ask differentials 
are currently no more than $0.25 when the bid is less than $2, no more 
than $0.40 when the bid is at least $2 but does not exceed $5, no more 
than $0.50 where the bid is more than $5 but does not exceed $10, no 
more than $0.80 when the bid is more than $10 but does not exceed $20, 
and no more than $1 where the bid is more than $20. CBOE Rule 
8.7(b)(iv) provides that the Exchange may establish differences other 
than the above for one or more option series.\7\ Additionally, CBOE 
Rule 8.7(b)(4) provides that the differentials stated above do not 
apply to in-the-money-series where the underlying securities market is 
wider than the above; for those series, the differential may be as wide 
as the quotation on the primary market of the underlying security. With 
respect to option classes trading on Hybrid or Hybrid 2.0, bids and 
offers may be quoted electronically with a difference not to exceed $5 
following the opening rotation regardless of the price of the bid.
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    \7\ The CBOE proposes to amend CBOE Rule 8.7(b)(iv) to 
substitute the Exchange for the appropriate Market Performance 
Committee.
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    With respect to the bid/ask differentials in open outcry, the CBOE 
is proposing to amend CBOE Rule 8.7(b)(iv) to modify the existing 
allowable bid/ask differentials as follows. The proposed rule change 
maintains in amended paragraph (A) of CBOE Rule 8.7(b)(iv) the existing 
provisions of CBOE Rule 8.7(b)(iv) which allow the bid/ask 
differentials for in-the-money series to be quoted in open outcry as 
wide as the quotation in the underlying securities market. 
Additionally, the Exchange proposes to cross reference in amended CBOE 
Rule 8.7(b)(iv)(A) the provisions of CBOE Rule 8.7, Interpretation and 
Policy .08, pertaining to bid/ask differentials for index options as to 
which the Exchange or its authorized agent calculates bids and asks.\8\ 
Thus, under CBOE Rule 8.7(b)(iv)(A), as amended, the bid/ask 
differentials for in-the-money series of index options may be as wide 
as the

[[Page 7097]]

bid/ask differential calculated by the CBOE or its authorized agent 
pursuant to CBOE Rule 8.7, Interpretation and Policy .08.
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    \8\ CBOE Rule 8.7, Interpretation and Policy .08, provides that 
the Exchange or its authorized agent may calculate bid/ask values 
for various indexes for the sole purpose of determining permissible 
bid/ask differentials on options on those indexes.
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    The proposed rule change also establishes a new paragraph (B) under 
CBOE Rule 8.7(b)(iv), which provides that the provisions of CBOE Rule 
8.7(b)(iv)(A), as amended, shall apply during the opening rotation in 
Hybrid classes, Hybrid 2.0 classes, and non-Hybrid and non-Hybrid 2.0 
classes. As noted above, CBOE Rule 8.7(b)(iv)(A), as amended, sets 
forth the permissible bid/ask differentials for trading in open outcry. 
The CBOE states that new paragraph (B) of CBOE Rule 8.7(b)(iv) is 
consistent with the CBOE's existing rules pertaining to the permissible 
bid/ask differentials that apply during the opening rotation.\9\ Thus, 
according the CBOE, this proposed modification does not make any 
substantive changes to the CBOE's existing rules relating to the 
permissible bid/ask differentials during the opening rotation.
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    \9\ For example, CBOE Rule 6.2B, ``Hybrid Opening System,'' 
provides that in calculating an Expected Opening Price during the 
opening, the quote of the Designated Primary Market Maker or at 
least one Market Maker or Lead Market Maker with an appointment in 
an options class must be present and comply with the legal width 
quote requirements of current CBOE Rule 8.7(b)(iv). In addition, 
CBOE Rule 8.7(b)(iv)(A) currently provides that for classes trading 
on Hybrid, the quote widths in CBOE Rule 8.7(b)(iv) apply during the 
opening rotation in each security.
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    New paragraph (C) of CBOE Rule 8.7(b)(iv) contains the permissible 
quote width differentials that apply to option classes trading on 
Hybrid and Hybrid 2.0. These quote width differentials were previously 
contained in CBOE Rule 8.7(b)(iv)(A). New paragraph (C) makes clear 
that the quote width differentials that apply to options classes 
trading on Hybrid are equally applicable to option classes trading on 
Hybrid 2.0. In addition, proposed new CBOE Rule 8.7(b)(iv)(C)(i) 
provides that the quote widths for in-the-money series of options 
classes trading on Hybrid and Hybrid 2.0 may be as wide as the quote 
width of the underlying security or index reported by the Exchange or 
its agent, as applicable, when that quote width is greater than $5. The 
CBOE states that these provisions are identical to International 
Securities Exchange (``ISE'') Rule 803(b)(4).
    Additionally, proposed new paragraph (C) would permit the Exchange 
to establish permissible quote width differentials other than as 
provided in CBOE Rule 8.7(b)(iv)(C). For example, the Exchange may 
determine to grant bid/ask relief in the event of unusual 
circumstances, such as a pending merger or acquisition of an underlying 
security, a distribution of a special cash dividend, or other unusual 
circumstances. The CBOE believes that granting the Exchange the ability 
to establish quote width differentials greater than $5 in unusual 
circumstances will have no deleterious effects on average quote widths 
and will contribute to the maintenance of efficient markets. The CBOE 
notes that this provision is consistent with ISE Rule 803(b)(4), which 
grants the ISE the authority to establish quote width differences other 
than as provided in ISE Rule 803(b)(4).
2. Statutory Basis
    The CBOE believes that the proposed rule change is consistent with 
the Act \10\ 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.\11\ Specifically, the CBOE believes that the 
proposed rule change is consistent with the requirements under Section 
6(b)(5) \12\ of the Act 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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    \10\ 15 U.S.C. 78a et seq.
    \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

    The 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 CBOE neither solicited nor received comments on the proposal.

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

    The CBOE has designated the proposed rule change as one that: (i) 
Does not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative for 30 days from the date of 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\ The CBOE has asked the Commission to waive the 
requirement in Rule 19b-4(f)(6)(iii) \15\ that the CBOE provide the 
Commission with written notice of its intention to file the proposed 
rule change, along with a brief description and the text of the 
proposed rule change, at least five business days prior to filing the 
proposal with the Commission.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act, a proposal does 
not become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest. The CBOE has asked the 
Commission to waive the 30-day operative delay and to allow the 
proposal to become operative upon filing. In this regard, the CBOE 
states that the proposal raises no unique issues and that it 
reorganizes CBOE Rule 8.7 to make clear the bid/ask differential 
provisions that apply in open outcry, during the opening rotation, and 
to classes trading on Hybrid and Hybrid 2.0. In addition, the CBOE 
states that new subparagraphs (i) and (ii) of CBOE Rule 8.7(b)(iv)(C) 
are consistent with ISE Rule 803(b)(4).
    The Commission waives the five-day pre-filing requirement. In 
addition, the Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest because the proposed changes to CBOE Rule 8.7 are consistent 
with existing CBOE or ISE rules.\16\ In this regard, current CBOE Rule 
8.7(b)(iv), which applies to trading in open outcry and which will be 
renumbered as CBOE Rule 8.7(b)(iv)(A), provides that the bid/ask 
differential for in-the-money option series may be as wide as the bid/
ask differential in the primary market for the underlying security. 
CBOE Rule 8.7(b)(iv)(A), as amended, extends this principal to in-the-
money index option series by allowing the bids/ask differentials for 
these series to be as wide as the bid/ask differential calculated by 
the CBOE or its agent. Similarly, current CBOE Rule 8.7(b)(iv)(A), 
which will be renumbered as CBOE Rule 8.7(b)(iv)(C), provides that the 
quote widths specified in current CBOE Rule 8.7(b)(iv) apply to Hybrid 
classes during the opening rotation. New CBOE Rule 8.7(b)(iv)(B) 
applies these quote widths to the opening rotation in Hybrid classes,

[[Page 7098]]

Hybrid 2.0 classes, and Non-Hybrid and Non-Hybrid 2.0 classes. The CBOE 
represents that this modification makes no substantive changes to the 
CBOE's existing rules relating to permissible bid/ask differentials 
during the opening rotation.\17\ New CBOE Rule 8.7(b)(4)(C)(i), which 
allows the bid/ask differential for in-the-money series trading on 
Hybrid and Hybrid 2.0 to be as wide as the quote width on the primary 
market or, for index options, as wide as the quote width calculated by 
the CBOE or its agent, is consistent with renumbered CBOE Rule 
8.7(b)(iv)(A), as discussed above, and with current ISE Rule 
803(b)(4)(i).\18\ New CBOE Rule 8.7(b)(4)(C)(ii), allowing the CBOE to 
establish quote width differentials other than the $5 width provided in 
CBOE Rule 8.7(b)(4)(C) for Hybrid and Hybrid 2.0 classes, is consistent 
with current CBOE Rule 8.7(b)(iv) and with ISE Rule 803(b)(4).\19\ In 
addition, new CBOE Rule 8.7(b)(4)(C) makes clear that the $5 bid/ask 
differential provided in that rule applies to both Hybrid and Hybrid 
2.0 option classes. For these reasons, the Commission designates that 
the proposed rule change become operative as of the date of the filing 
of the proposal.
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    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \17\ See also note 9, supra.
    \18\ ISE Rule 803(b)(4)(i) provides that the bid/ask 
differential for in-the-money series may be as wide as the quotation 
on the primary market of the underlying security.
    \19\ Current CBOE Rule 8.7(b)(iv), which applies to trading in 
open outcry, allows the CBOE to establish bid/ask differentials 
other than those provided in CBOE Rule 8.7(b)(iv) for one or more 
options series. Similarly, ISE Rule 803(b)(4) allows the ISE to 
establish bid/ask differentials other than those specified in ISE 
Rule 803(b)(4) for one or more options series.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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 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-2006-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-CBOE-2006-12. 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 the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. 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 No. SR-
CBOE-2006-12 and should be submitted on or before March 3, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-1837 Filed 2-9-06; 8:45 am]
BILLING CODE 8010-01-P