[Federal Register Volume 71, Number 151 (Monday, August 7, 2006)]
[Notices]
[Pages 44729-44734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-12740]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54250; File No. SR-CBOE-2005-93]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
to a Proposed Rule Change and Amendment No. 1 Thereto To Establish a 
Quote Risk Monitor Mechanism and To Define Continuous Quoting

 July 31, 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 November 3, 2005, 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. 
On May 16, 2006, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons. In addition, the Commission is granting accelerated approval 
of the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced and superseded the original 
filing in its entirety, modified the proposed rule change to: (1) 
clarify the nature of a CBOE Market-Maker's obligation to quote 
``continuously'' in order to incorporate a ``99% standard'' 
applicable to electronic quotes; and (2) provide that Hybrid Market-
Makers are not required to use the QRM Mechanism.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to adopt CBOE Rule 1.1(ccc) to define the nature of 
CBOE Market-Makers' continuous electronic quoting obligations under the 
Exchange rules. CBOE also proposes to adopt CBOE Rule 8.18 to codify a 
description of the Quote Risk Monitor (``QRM'') Mechanism, which is a 
certain functionality the Exchange offers CBOE Market-Makers who have 
continuous electronic quoting obligations under Exchange rules for the 
Hybrid Trading System and Hybrid 2.0 Platform (``Hybrid'') to help them 
manage their quotations. The text of the proposed rule change, as 
amended, is below. Proposed new language is in italics; proposed 
deletions are in [brackets].
Rule 1.1. Definitions
    When used in these Rules, unless the context otherwise requires: 
(a)-(bbb) No change.

Continuous Electronic Quotes

    (ccc) With respect to a Market-Maker who is obligated to provide 
continuous electronic quotes on the Hybrid Trading System or Hybrid 2.0 
Platform (``Hybrid Market Maker''), the Hybrid Market-Maker shall be 
deemed to have provided ``continuous electronic quotes'' if the Hybrid 
Market-Maker provides electronic two-sided quotes for 99% of the time 
that the Hybrid Market-Maker is required to provide electronic quotes 
in an appointed option class on a given trading day. If a technical 
failure or limitation of a system of the Exchange prevents the Hybrid 
Market-Maker from maintaining, or prevents the Hybrid Market-Maker from 
communicating to the Exchange, timely and accurate electronic quotes in 
a class, the duration of such failure shall not be considered in 
determining whether the Hybrid Market-Maker has satisfied the 99% 
quoting standard with respect to that option class. The Exchange may 
consider other exceptions to this continuous electronic quote 
obligation based on demonstrated legal or regulatory requirements or 
other mitigating circumstances.
* * * * *
Rule 8.7--Obligations of Market-Makers
    (a)-(c) No change.
    (d) Market Making Obligations in Applicable Hybrid Classes
    The following obligations in this paragraph (d) are only applicable 
to Market-Makers trading classes on the CBOE Hybrid System and only in 
those Hybrid classes. As such, this paragraph has no applicability to 
non-Hybrid classes. This paragraph is not applicable to Remote Market-
Makers, who instead will be subject to the obligations imposed by Rule 
8.7(e). Unless otherwise provided in this Rule, Market-Makers trading 
classes on the Hybrid System remain subject to all obligations imposed 
by CBOE Rule 8.7. To the extent another obligation contained elsewhere 
in Rule 8.7 is inconsistent with an obligation contained in paragraph 
(d) of Rule 8.7 with respect to a class trading on Hybrid, this 
paragraph (d) shall govern trading in the Hybrid class.
    These requirements are applicable on a per class basis depending 
upon the percentage of volume a Market-Maker transacts electronically 
versus in open outcry. With respect to making this determination, the 
Exchange will

[[Page 44730]]

monitor Market-Makers' trading activity every calendar quarter to 
determine whether they exceed the thresholds established in [this] 
paragraph (d)(i). If a Market-Maker exceeds the threshold established 
below, the obligations contained in (d)(ii) will be effective the next 
calendar quarter.
    For a period of ninety (90) days commencing immediately after a 
class begins trading on the Hybrid system, the provisions of paragraph 
(d)(i) shall govern trading in that class.
    (i) Market-Maker Trades [Less Than] 20% or Less Contract Volume 
Electronically:
    If a Market-Maker on the CBOE Hybrid System never transacts more 
than 20% (i.e., he trades 20% or less) of his contract volume 
electronically in an appointed Hybrid class during any calendar 
quarter, the following provisions shall apply to that Market-Maker with 
respect to that class:
    (A) Quote Widths: With respect to electronic quoting, the Market-
Maker will not be required to comply with the quote width requirements 
of CBOE Rule 8.7(b)(iv) in that class. The effectiveness of this 
subparagraph (i)(A) shall be in effect in each Hybrid for a period of 
one year commencing with the date the class begins trading on the 
Hybrid System.
    (B) Continuous Electronic Quoting Obligation: The Market-Maker will 
not be obligated to quote electronically in any designated percentage 
of series within that class. If a Market-Maker quotes electronically, 
its undecremented quote must be for at least ten contracts (``10-up''), 
unless the underlying primary market disseminates a 100-share quote, in 
which case the Market-Maker's undecremented quote may be for as low as 
1-contract (``1-up''). The ability to quote 1-up when the underlying 
primary quotes 100 shares is expressly conditioned on the process being 
automated (i.e., a Market-Maker may not manually adjust his quotes to 
reflect 1-up sizes). Quotes must automatically return to at least 10-up 
when the underlying primary market no longer disseminates a 100-share 
quote. Market-Makers that have not automated this process may not avail 
themselves of the relief provided herein. The ability to quote 1-up 
shall operate on a pilot basis and shall terminate February 17, 2006.
    (C) Continuous Open Outcry Quoting Obligation: In response to any 
request for quote by a [floor broker or DPM representing an order as 
agent] member or PAR Official, Market-Makers must provide a two-sided 
market complying with the quote width requirements contained in Rule 
8.7(b)(iv) for a minimum of ten contracts for non-broker-dealer orders 
and one contract for broker-dealer orders.
    (D) In-Person Quoting Requirement: Any volume transacted 
electronically will not count towards the Market-Maker's in-person 
requirement contained in Rule 8.7.03(B).
    (ii) Market-Maker Trades More Than 20% Contract Volume 
Electronically:
    If a Market-Maker on the CBOE Hybrid System transacts more than 20% 
of his contract volume electronically in an appointed Hybrid class 
during any calendar quarter, commencing the next calendar quarter he 
will be subject to the following quoting obligations in that class for 
as long as he remains in that class:
    (A) Quote Widths: The Market-Maker must comply with the quote width 
requirements contained in Rule 8.7(b)(iv).
    (B) Continuous Electronic Quoting Obligation: A Market-Maker will 
be required to maintain continuous electronic [two-sided] quotes (as 
defined in Rule 1.1(ccc)) [for at least ten contracts (undecremented 
size)] in 60% of the series of his/her appointed class[es]. The initial 
size of a Market-Maker's quote must be for at least ten contracts 
(undecremented size). If the underlying primary market disseminates a 
100-share quote, a Market-Maker's undecremented quote may be for as low 
as 1-contract (``1-up''), however, this ability is expressly 
conditioned on the process being automated (i.e., a Market-Maker may 
not manually adjust his quotes to reflect 1-up sizes). Quotes must 
automatically return to at least 10-up when the underlying primary 
market no longer disseminates a 100-share quote. Market-Makers that 
have not automated this process may not avail themselves of the relief 
provided herein. The ability to quote 1-up shall operate on a pilot 
basis and shall terminate February 17, 2006.
    (C) Continuous Open Outcry Quoting Obligation: In response to any 
request for quote by a [floor broker or DPM representing an order as 
agent] member or PAR Official, in-crowd Market-Makers must provide a 
two-sided market complying with the current quote width requirements 
contained in Rule 8.7(b)(iv) for a minimum of ten contracts for non-
broker-dealer orders and one contract for broker-dealer orders.
    (iii) The obligations and duties of Market-Makers set forth in 
paragraphs (d)(i) and (d)(ii) apply to a Market-Maker on a per class 
basis and only when the Market-Maker is quoting in a particular class 
on a given trading day (e.g., if on a given trading day a Market-Maker 
is quoting in 1 of his/her 10 appointed classes, the Market-Maker has 
quote width, continuous electronic quoting and, to the extent the 
Market-Maker is present in the trading crowd, continuous open outcry 
quoting obligations in that class; the continuous electronic quoting 
obligation in subparagraph (d)(ii)(B) applies to 60% of the series of 
that class while the Market-Maker is quoting). The obligations and 
duties are not applicable to an appointed class if a Market-Maker is 
not quoting in that appointed class.
    (iv) A Market-Maker that is in the trading crowd but that is not 
quoting electronically or in open outcry in an appointed class must 
provide an open outcry two-sided market complying with the current 
quote width requirements contained in Rule 8.7(b)(iv) for a minimum of 
ten contracts for non-broker-dealer orders and one contract for broker-
dealer orders in response to a request for quote by a member or PAR 
Official directed at that Market-Maker or when, in response to a 
general request for a quote by a member of PAR Official, a market is 
not then being vocalized by a reasonable number of Market-Makers. A 
Market-Maker may also be called upon by an Exchange official designated 
by the Board of Directors to submit a single quote or maintain 
continuous quotes in one or more series of a class to which the Market-
Maker is appointed whenever, in the judgment of such official, it is 
necessary to do so in the interest of maintaining a fair and orderly 
market.
    (e) Obligations of Remote Market-Makers (RMMs): The following 
obligations apply only to RMMs:
    (i) An RMM[s] must provide legal-width, continuous [two-sided, 
legal-width quotations] electronic quotes (as defined in Rule 1.1(ccc)) 
in 60% of the series of [their] its appointed class[es]. The initial 
size of an RMM's quote must be for at least ten contracts 
(undecremented size). [The Exchange may consider exceptions to this 
quoting requirement based on demonstrated legal or regulatory 
requirements or other mitigating circumstances (e.g., excused leaves of 
absence, personal emergencies, or equipment problems).] If the 
underlying primary market disseminates a 100-share quote, an RMM's 
undecremented quote may be for as low as 1-contract (``1-up''), 
however, this ability is expressly conditioned on the process being 
automated (i.e., an RMM may not manually adjust its quotes to reflect 
1-up sizes). Quotes must automatically return to at least 10-up when 
the underlying primary market no longer disseminates a 100-share quote. 
RMMs that have not automated this

[[Page 44731]]

process may not avail themselves of the relief provided herein. The 
ability to quote 1-up shall operate on a pilot basis and shall 
terminate February 17, 2006.
    The obligations and duties of an RMM set forth in this paragraph 
(e)(i) apply to an RMM on a per class basis and only when the RMM is 
logged on to the CBOE Hybrid system and quoting electronically in a 
particular class on a given trading day (e.g., if on a given trading 
day an RMM is logged in and quoting electronically in 1 of its 10 
appointed classes, the RMM has quote width and continuous electronic 
quoting obligations in that class; the continuous electronic quoting 
obligation applies to 60% of the series of that class while the RMM is 
logged on to the CBOE Hybrid system and quoting electronically in that 
class). The obligations and duties are not applicable to an appointed 
class if an RMM is not logged in and quoting electronically in that 
appointed class.
    (ii) An RMM may be called upon by an Exchange official designated 
by the Board of Directors to submit a single electronic quote or 
maintain continuous electronic quotes in one or more series of a class 
to which the RMM is appointed whenever, in the judgment of such 
official, it is necessary to do so in the interest of maintaining a 
fair and orderly market.
    (iii)-(vi) No change.
    * * * Interpretations and Policies:
    .01-.13 No change.
* * * * *
Rule 8.13. Preferred Market-Maker Program
    (a) No change.
    (b) Eligibility. Any Exchange Market-Maker type (e.g. Remote 
Market-Maker, Lead Market-Maker, and Designated Primary Market-Maker) 
may be designated as a Preferred Market-Maker, however, a recipient of 
a Preferred Market-Maker order will only receive a participation 
entitlement for such order if the following provisions are met:
    (i)-(ii) No change.
    (iii) The Preferred Market-Maker must comply with the quoting 
obligations applicable to its Market-Maker type under Exchange rules 
and must provide continuous [two-sided quotations] electronic quotes 
(as defined in Rule 1.1(ccc)) in at least 90% of the series of each 
class for which it receives Preferred Market-Maker orders.
    (c) No change.
* * * * *
Rule 8.15A. Lead Market-Makers in Hybrid Classes
    (a) No change.
    (b) LMM Obligations: LMMs are required to:
    (i) provide continuous [market quotations] electronic quotes (as 
defined in Rule 1.1(ccc)) that comply with the bid/ask differentials 
permitted by Rule 8.7(b) in 90% of the option series within their 
assigned classes;
    (ii)-(vi) No change.
* * * * *

Rule 8.18. Quote Risk Monitor Mechanism

    Each Market-Maker who is obligated to provide and maintain 
continuous electronic quotes (as defined in Rule 1.1(ccc)) in an option 
class traded on the Hybrid Trading System or the Hybrid 2.0 Platform 
(``Hybrid Market-Maker'') may establish parameters by which the 
Exchange will activate the Quote Risk Monitor (``QRM'') Mechanism. 
Hybrid Market-Makers that use the QRM Mechanism shall specify, for each 
such option class in which the Hybrid Market-Maker is engaged in 
trading, a maximum number of contracts for such option class (the 
``Contract Limit'') and a rolling time period in seconds within which 
such Contract Limit is to be measured (the ``Measurement Interval''). 
When the Exchange determines that the Hybrid Market-Maker has traded 
more than the Contract Limit for such option class during any rolling 
Measurement Interval, the QRM Mechanism shall cancel all electronic 
quotes that are being disseminated with respect to that Hybrid Market-
Maker in that option class until the Hybrid Market-Maker refreshes 
those electronic quotes.
* * * * *
Rule 8.85. DPM Obligations
    (a) Dealer Transactions. Each DPM shall fulfill all of the 
obligations of a Market-Maker under the Rules, and shall satisfy each 
of the following requirements in respect of each of the securities 
allocated to the DPM. To the extent that there is any inconsistency 
between the specific obligations of a DPM set forth in subparagraphs 
(a)(i) through (a)(xi) of this Rule and the general obligations of a 
Market-Maker under the Rules, subparagraphs (a)(i) through (a)(xi) of 
this Rule shall govern. Each DPM shall:
    (i) provide continuous [market quotations] electronic quotes (as 
defined in Rule 1.1(ccc)) for each class and series allocated to it and 
assure that its disseminated market quotations are accurate;
    (ii)-(xii) No change.
    (b)-(e) No change.
    * * * Interpretations and Policies:
    .01-.03 No change.
* * * * *
Rule 8.93. e-DPM Obligations
    Each e-DPM shall fulfill all of the obligations of a Market-Maker 
and of a DPM under the Rules (except those contained in Rules 
8.85(a)(i),(iv),(v) and (vii)-(x), 8.85(b), 8.85(c)(i) and (v), and 
8.85(e)), and shall satisfy each of the following requirements:
    (i) provide continuous [two-sided quotations] electronic quotes (as 
defined in Rule 1.1(ccc)) in at least 90% of the series of each 
allocated class, or alternatively, respond to 98% of Requests for 
Quotes (RFQs) if RFQ functionality is enabled as determined by the 
Exchange;
    (ii)-(xi) 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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. CBOE 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

Proposed CBOE Rule 1.1(ccc)

    The purpose of the proposed change to CBOE Rule 1.1 is to define 
the nature of a CBOE Market-Maker's obligation to provide 
``continuous'' electronic quotes in an option class traded on Hybrid. 
This continuous electronic quoting obligation is contained in various 
CBOE rules--including CBOE Rules 8.7(d)(ii)(B), 8.7(e), 8.13(b)(iii), 
8.14(b)(2), 8.15A(b)(i), 8.85(a)(i), and 8.93(i)--and these rules in 
turn prescribe the percentage of the series of an option class with 
respect to which specified types of Market-Makers (``Hybrid Market-
Makers'') have an obligation to provide continuous electronic quotes.
    Proposed CBOE Rule 1.1(ccc) will provide that a Hybrid Market-Maker 
satisfies the continuous electronic quoting obligation by providing 
electronic quotes for 99% of the time that the Hybrid Market-Maker is 
obligated to provide electronic quotes in an appointed option class on 
a given trading day. Proposed CBOE Rule

[[Page 44732]]

1.1(ccc) recognizes that there is always an interval between successive 
electronic quotes and that ``continuous'' electronic quoting cannot 
literally preclude all gaps in electronic quoting. In addition, gaps in 
electronic quoting are expected in certain circumstances. For instance, 
a Hybrid Market-Maker requires time to repost electronic quotes either 
after the quantity associated with an electronic quote has been 
exhausted by trades done at the quoted price or after electronic quotes 
have been canceled pursuant to the Quote Risk Monitor covered by 
proposed CBOE Rule 8.18.
    In applying the proposed definition, the Exchange notes that the 
duration of a Hybrid Market-Maker's continuous electronic quoting 
obligation, and the percentage of series to which that obligation 
applies, varies depending on the particular type of Market-Maker. For 
instance, the Exchange rules impose a continuous electronic quoting 
obligation for the time the Exchange is open for trading in 100% of the 
series in each of a Designated Primary Market-Maker's (``DPM'') 
appointed classes, in 90% of the series in each of an Electronic DPM's 
(``e-DPM'') appointed classes, and in 90% of the series in each of a 
Lead Market-Maker's (``LMM'') appointed classes. The Exchange thus 
believes that these types of Market-Makers should be deemed to have 
provided continuous electronic quotes with respect to the applicable 
percentage of series in an option class if the respective DPM, e-DPM, 
or LMM has provided electronic quotes for 99% of the time that the 
Exchange is open for trading in that option class on a given trading 
day. The Exchange rules also impose a continuous electronic quoting 
obligation in 60% of the series in the respective Market-Maker's or 
Remote Market-Maker's (``RMM'') appointed class which applies only 
during the time the Market-Maker is quoting in the class or the RMM is 
logged onto Hybrid and quoting in that class. The Exchange thus 
believes that these two types of Market-Makers should be deemed to have 
provided continuous electronic quotes with respect to the applicable 
percentage of series in an option class if the respective Market-Maker 
or RMM has provided electronic quotes for 99% of the time that he is 
quoting in the class (in the case of a Market-Maker) or logged into 
Hybrid and quoting in that option class (in the case of an RMM) on a 
given trading day. Consequently, in calculating compliance with CBOE 
Rule 1.1(ccc), any time interval during which the Market-Maker or RMM 
has ceased quoting in that option class (e.g., while taking breaks, 
during lunch or upon ceasing trading for the day) would not be 
considered.
    The Exchange believes that the 99% standard sets an appropriately 
high threshold for continuous electronic quoting, while also 
recognizing the circumstances under which a Hybrid Market-Maker may 
require a brief time interval in order to post new electronic quotes. 
This 99% standard is similar to one contained in a rule submitted by 
the Pacific Exchange, Inc. (``PCX'') and approved by the Commission.\4\
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    \4\ See Securities Exchange Act Release No. 51740 (May 25, 
2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-64) (notice of filing 
and order granting accelerated approval to SR-PCX-2005-64).
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    The Exchange does not believe that a Hybrid Market-Maker has failed 
to quote continuously if Exchange technical problems prevent electronic 
quotes from being provided. Accordingly, if a technical failure or 
limitation in an Exchange system prevents a Hybrid Market-Maker from 
maintaining, or communicating to the Exchange, timely and accurate 
electronic quotes, proposed CBOE Rule 1.1(ccc) would exclude the 
duration of that technical failure or limitation in determining whether 
the Hybrid Market-Maker has satisfied the 99% continuous electronic 
quote obligation with respect to that option class.
    Proposed CBOE Rule 1.1(ccc) will also provide that the Exchange may 
consider other exceptions to the continuous electronic quote obligation 
based on demonstrated legal or regulatory requirements or other 
mitigating circumstances.\5\ This provision is the same as an existing 
provision with respect to continuous electronic quoting obligations of 
RMMs contained in CBOE Rule 8.7(e). The Exchange believes it is 
appropriate to apply the same considerations to all Hybrid Market-
Makers with continuous electronic quoting obligations and including 
this provision within the text of proposed CBOE Rule 1.1(ccc) 
accordingly reflects that principle. The Exchange is also proposing to 
amend various rules to include cross-references to the definition of 
``continuous electronic quotes'' contained in proposed CBOE Rule 
1.1(ccc). The Exchange will conduct regulatory surveillance for 
compliance with the 99% continuous electronic quote requirement set 
forth in CBOE Rule 1.1(ccc).
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    \5\ Mitigating circumstances that may be considered by the 
Exchange may include, but is not limited to, instances where a 
technical failure or limitation in a Hybrid Market-Maker's system 
prevents the Hybrid Market-Maker from maintaining, or communicating 
to the Exchange, timely and accurate electronic quotes. However, a 
pattern or practice of technical failures or limitations, or the 
excessive frequency of technical failures or limitations, may also 
be considered by the Exchange in determining whether to except the 
period of time from the continuous electronic quoting requirements.
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    The Exchange is proposing various clarifying changes to CBOE Rule 
8.7 respecting Market-Maker and RMM quoting obligations in order to 
clarify the intent and application of the rule that the continuous 
electronic quoting obligations apply on a per class basis and only 
during the time the respective Market-Maker is quoting or respective 
RMM is logged onto Hybrid and quoting, and to clarify certain open 
outcry quoting obligations. First, the changes make clear that 
obligations and duties of Market-Makers, as set forth in paragraph (d) 
of CBOE Rule 8.7, apply to a Market-Maker on a per class basis and only 
when the Market-Maker is quoting in a particular class on a given 
trading day (e.g., if on a given trading day a Market-Maker is quoting 
in 1 of his 10 appointed classes, the Market-Maker has quote width, 
continuous electronic quoting and, to the extent the Market-Maker is 
present in the trading crowd, continuous open outcry quoting 
obligations in that 1 class; the continuous electronic quoting 
obligation applies in 60% of the series of that class while the Market-
Maker is quoting in that class). The obligations and duties are not 
applicable to an appointed class if a Market-Maker is not quoting in an 
appointed class. The clarifications also make clear that, under certain 
circumstances, a Market-Maker present in the trading crowd may still be 
obligated to provide a quote in an appointed class that he is not 
currently quoting in electronically or in open outcry. Specifically, a 
Market-Maker in the trading crowd must provide an open outcry two-sided 
market complying with the Exchange rules on quote width and size in 
response to a request for quote directed at that Market-Maker or when, 
in response to a general request for a quote, a market is not then 
being vocalized in that series by a reasonable number of Market-Makers. 
These obligations are derived from CBOE Rule 8.7(b), which describes 
various conditions that trigger a Market-Maker's duty to verbalize a 
market in a particular option series. In addition, a Market-Maker may 
also be called upon by an Exchange official designated by the Board of 
Directors to submit a single quote or maintain continuous quotes in one 
or more series of a class to which the Market-Maker is appointed 
whenever, in the judgment of such official, it is necessary to do so in 
the interest of maintaining a fair and orderly

[[Page 44733]]

market. This Exchange official provision is parallel to language that 
is already provided in paragraph (e) for RMMs.
    Second, the changes make clear the obligations and duties of RMMs, 
as set forth in paragraph (e) of CBOE Rule 8.7, apply to an RMM on a 
per class basis and only when the RMM is logged on to the CBOE Hybrid 
system and quoting in a particular class on a given trading day (e.g., 
if on a given trading day an RMM is logged in and quoting in 1 of its 
10 appointed classes, the RMM has quote width and continuous electronic 
quoting obligations in that 1 class; the continuous electronic quoting 
obligation applies in 60% of the series of that class while the RMM is 
logged in and quoting in that class). The obligations and duties are 
not applicable to an appointed class if an RMM is not logged in and 
quoting in that appointed class. Clarifying language proposed to be 
added to paragraph (e) make clear these obligations and duties of RMMs.
    Finally, the Exchange is proposing to amend the text in paragraphs 
(d)(i)(C) and (d)(ii)(C) of CBOE Rule 8.7, which pertains to the 
continuous open outcry quoting obligation of Market-Makers. The revised 
text will provide that the open outcry quoting obligation is triggered 
in response to a request for quote by a member or Exchange PAR 
Official. As currently written, the obligation is only triggered in 
response to a request for quote from a floor broker or a DPM 
representing an order as agent, the later of which is an outdated 
reference because DPMs no longer perform an agency function.\6\
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    \6\ See Securities Exchange Act Release No. 52798 (November 18, 
2005), 70 FR 71344 (November 28, 2005) (order approving amendments 
relating to the removal of agency responsibilities from DPMs and the 
establishment of PAR Officials).
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Proposed CBOE Rule 8.18

    Through this rule change, the Exchange is also seeking to codify in 
its rules a service CBOE offers Hybrid Market-Makers to help them 
manage their quotations. As discussed above, CBOE Rules require Hybrid 
Market-Makers to maintain continuous electronic quotes. To comply with 
this requirement, each Hybrid Market-Maker can employ its own 
proprietary quotation and risk management systems to determine the 
prices and sizes at which it quotes. In addition, Hybrid also has the 
QRM Mechanism, which is designed to help Hybrid Market-Makers manage 
their quotations in related option series.
    A Hybrid Market-Maker's risk in an options class is not limited to 
the risk in a single series of that class. Rather, a Hybrid Market-
Maker typically is active in quoting in multiple option classes, and 
each such option class can comprise dozens of individual option series. 
Under the Hybrid systems, trades are automatically effected against the 
Hybrid Market-Maker's then current quote. As a result, a Hybrid Market-
Maker faces exposure in all series of a class, requiring that the 
Hybrid Market-Maker off-set or otherwise hedge its overall position in 
a class. The QRM functionality described in Proposed CBOE Rule 8.18 
helps Hybrid Market-Makers limit this overall exposure and risk. 
Specifically, the functionality permits a Hybrid Market-Maker to 
establish parameters in the Hybrid to cancel its electronic quotes in 
all series of an option class until the Hybrid Market-Maker refreshes 
those electronic quotes.
    Under proposed CBOE Rule 8.18, each Hybrid Market-Maker that elect 
to use the functionality would be required to specify two parameters 
that the QRM Mechanism would use to determine when that Hybrid Market-
Maker's quotes should be cancelled. In particular, each Hybrid Market-
Maker is required to specify a maximum number of contracts for each 
option class (the ``Contract Limit'') and a rolling time period in 
seconds during which such Contract Limit is to be measured (the 
``Measurement Interval'').
    When the QRM Mechanism determines that the Hybrid Market-Maker has 
traded more than the Contract Limit for any option class during any 
rolling Measurement Interval, the QRM Mechanism automatically cancels 
all of the Hybrid Market-Maker's quotes in any series of that option 
class. By limiting its exposure across series, a Hybrid Market-Maker is 
better able to quote aggressively in an option, knowing that the QRM 
Mechanism will automatically cancel all its quotations in a class when 
its exposure limit it hit.
    The Exchange notes that the proposed rule would not relieve a 
Hybrid Market-Maker of its obligations to provide continuous electronic 
quotes under the Exchange rules nor to provide ``firm'' quotes pursuant 
to the requirements of CBOE Rule 8.51.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\7\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\8\ in particular, in that it is designed 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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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
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 either solicited or received with respect 
to the proposed rule change.

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-2005-93 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-2005-93. 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

[[Page 44734]]

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 publicly 
available. All submissions should refer to File Number SR-CBOE-2005-93 
and should be submitted on or before August 28, 2006.

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

    After careful review, 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.\9\ In particular, the Commission believes that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\10\ 
which requires among other things, that the rules of the Exchange are 
designed 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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    \9\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed QRM Mechanism should 
provide Hybrid Market-Makers assistance in effectively managing its 
quotations. In conjunction with the implementation of the QRM 
Mechanism, CBOE proposes to define the nature of Hybrid Market-Makers' 
continuous electronic quoting obligations under its rules. The 
Commission believes that it is consistent with the Act to allow CBOE to 
define ``continuous electronic quotes'' as providing electronic two-
sided quotes for 99% of the time that the Hybrid Market-Maker is 
required to provide electronic quotes in an appointed option class on a 
given trading day. The Commission notes that when the QRM Mechanism is 
triggered for an option class it will automatically cancel all of the 
Hybrid Market-Maker's quotes in any series of that option class. The 
Commission believes that the proposed definition of ``continuous 
electronic quotes'' should provide a Hybrid Market-Maker a brief amount 
of time to update its quotes after the QRM Mechanism has canceled its 
quotes in an option class.
    In addition, CBOE proposes certain clarifying changes to CBOE Rule 
8.7 regarding Market-Maker and RMM quoting obligations. Specifically, 
CBOE proposes to clarify the intent and application of the rule that 
the continuous electronic quoting obligations apply on a per class 
basis and only during the time the respective Market-Maker is quoting 
or respective RMM is logged onto Hybrid and quoting, and to clarify 
certain open outcry quoting obligations. The Commission believes that 
these clarifying changes are appropriate and consistent with the Act.
    The Commission notes that the proposal does not alter the 
obligations of Hybrid Market-Makers, except for the fact that it will 
specifically define what it means to provide continuous electronic 
quotes. The Commission also notes that CBOE has represented that it 
will conduct routine surveillance for Hybrid Market-Maker compliance 
with the 99% standard for continuous electronic quotes set forth in 
CBOE Rule 1.1(ccc).
    CBOE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
notes that similar proposals to provide protection from risk for market 
makers have been approved for other options exchanges.\11\ The 
Commission believes that granting accelerated approval of the proposal 
should allow Hybrid Market-Makers to have similar protections from the 
risk associated with an excessive number of near simultaneous 
executions in a single options class. Accordingly, the Commission finds 
good cause, pursuant to Section 19(b)(2) of the Act,\12\ for approving 
the proposed rule change, as amended, prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register.
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    \11\ See Securities Exchange Act Release Nos. 51049 (January 18, 
2005), 70 FR 3756 (January 26, 2005) (SR-BSE-2004-52); 51050 
(January 18, 2005), 70 FR 3758 (January 26, 2005) (SR-ISE-2004-31); 
51740 (May 25, 2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-64); 
53148 (January 19, 2006), 71 FR 4386 (January 26, 2006) (SR-Amex-
2005-131); and 53166 (January 23, 2006), 71 FR 4625 (January 27, 
2006) (SR-Phlx-2006-05).
    \12\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2005-93) and Amendment 
No. 1 thereto be, and hereby are, approved on an accelerated basis.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-12740 Filed 8-4-06; 8:45 am]
BILLING CODE 8010-01-P