[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Notices]
[Pages 9183-9184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-2437]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53286; File No. SR-CBOE-2006-16]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
to a Proposed Rule Change To Amend CBOE Rule 8.7 To Implement CBOE's 1-
Up Program on a Permanent Basis

February 14, 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 February 8, 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 CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposal on an accelerated basis.
---------------------------------------------------------------------------

    \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 amend CBOE Rule 8.7 to make its 1-up Pilot 
Program permanent. The text of the proposed rule change is available on 
the CBOE's Web site (http://www.cboe.com), at the 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 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
    The purpose of the proposed rule change is to amend CBOE Rule 8.7 
to request permanent approval of the CBOE's pilot program that allows 
Market-Makers to submit an undecremented electronic quotation of a size 
as low as one 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 
``Program''). 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.\3\
---------------------------------------------------------------------------

    \3\ See CBOE Rule 8.7.
---------------------------------------------------------------------------

    On August 17, 2004, the Commission approved the Program on a one-
year pilot basis.\4\ Subsequently, on August 15, 2005, the Program was 
extended for an additional six months, until February 17, 2006, to 
allow the CBOE time to further consider whether the Program is a useful 
tool for Market-Makers to manage their risks when the underlying 
primary market quotes 1-up.\5\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 50205 (August 17, 
2004), 69 FR 51869 (August 23, 2004) (approving the pilot program as 
set forth in SR-CBOE-2003-39).
    \5\ See Securities Exchange Act Release No. 52256 (August 15, 
2005), 70 FR 48787 (August 19, 2005) (approving and extending the 
pilot program as set forth in SR-CBOE-2005-56).
---------------------------------------------------------------------------

    The CBOE believes that the Program has been effective in serving 
the original purpose of the rule filing, which 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. Accordingly, the CBOE requests 
that the Program be approved on a permanent basis.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder 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) Act \7\ 
requirements that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78(b).
    \7\ 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 
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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 9184]]

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 at (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2006-16 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 Number SR-CBOE-2006-16. 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-2006-16 and should be submitted on or before March 
15, 2006.

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

    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.\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 principals 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\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capial formation. See 15 
U.C.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes the Program, by providing CBOE Market-
Makers with the ability to adjust their quotation sizes to correspond 
to the liquidity in the underlying primary market, provides a 
reasonable method for Market-Makers to manage their risks when the 
primary market disseminates a 1-up market. The Commission notes that 
the Program has been operating on a pilot basis for almost 18 months 
and that, after evaluating quotation data relating to the Program, the 
CBOE believes that the Program is functioning as intended. The 
Commission also notes that, even though Market-Makers will have the 
ability to quote 1-up when the underlying primary market disseminates a 
1-up market, Market-Makers should have an incentive to display 
competitive quotations with significant size because the CBOE's 
matching algorithm for allocating incoming orders in CBOE's Hybrid 
Trading System is based in part of the size of the Market-Maker's 
quotation at the best price.
    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\10\ for approving the proposed rule change prior to the 
thirtieth day after publication in the Federal Register. The Program is 
scheduled to expire on February 17, 2006, and as such, to allow the 
Program to continue to operate without interruption, the Commission 
believes it is appropriate to accelerate approval. The Commission notes 
that no comments were received in connection with the approval of the 
Program on a pilot basis or the approval of the extension of the pilot 
period for the Program. Accordingly, the Commission finds that good 
cause exists, pursuant to section 6(b)(5) of the Act,\11\ to approve 
the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-2006-16), is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-2437 Filed 2-21-06; 8:45 am]
BILLING CODE 8010-01-P