[Federal Register Volume 71, Number 165 (Friday, August 25, 2006)]
[Notices]
[Pages 50480-50482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-14127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54332; File No. SR-CBOE-2006-70]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To Adopt Rules 
Relating to Regulation NMS

August 18, 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 August 18, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission

[[Page 50481]]

(``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

    The Exchange submits this rule change filing to modify its rules 
relating to the trading of non-option securities to conform with 
Regulation NMS. The text of the proposed rule change is available from 
the Exchange's Web site (http://www.cboe.com), the Exchange's principal 
office, the Commission's Web site (http://www.sec.gov), and 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 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
    CBOE anticipates migrating the trading of non-option securities on 
CBOE to CBOEdirect, the Exchange's screen-based trading platform. This 
migration is proposed in SR-CBOE-2004-21.\3\ Upon completion of the 
proposed migration, CBOE's platform for non-option securities would 
offer fully automated quotations that are accessible via automatic 
execution without regard to order size and that will never be posted 
``manually.'' Thus, unless execution of an order would cause an 
impermissible trade-through of another trading center, all marketable 
orders would automatically execute on the system against the Exchange 
quotation (which incorporates resting limit orders and interest from 
CBOE market-makers).
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    \3\ See Securities Exchange Act Release No. 53112 (January 12, 
2006), 71 FR 3579 (January 23, 2006).
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    The purpose of this filing to amend the rules proposed in SR-CBOE-
2004-21 to conform to certain requirements of Regulation NMS and to 
qualify as an automated trading center with protected quotations.\4\ In 
its release extending the compliance dates for Rules 610 and 611 of 
Regulation NMS,\5\ the Commission established a ``Specifications Date'' 
of October 16, 2006, by which certain milestones must be achieved by 
trading centers to ensure that quotations may be deemed protected from 
trade-throughs by other trading centers. A major component of the 
milestones relate to adopting certain rules that are consistent with 
Regulation NMS. More specifically, trading centers are required to: (1) 
Establish a framework for identifying (marking) quotations as automated 
or manual to meet the requirements of Rule 600(b)(4); (2) adopt an 
immediate-or-cancel order (``IOC'') functionality that meets the 
requirements of Rule 600(b)(3); and (3) adopt an intermarket sweep 
order (``ISO'') functionality that allows other industry participants 
to meet the requirements of Rule 600(b)(30). The proposed rules would 
modify CBOE's screen-based rules to specifically address these 
requirements as well as other matters relating to Regulation NMS.
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    \4\ The Commission notes that, at the time of filing of this 
proposal, it had taken no final action on SR-CBOE-2004-21. 
Therefore, the rules proposed in SR-CBOE-2004-21 have not yet been 
adopted by the Exchange, and the entire STOC ruleset is presented in 
Exhibit 5 to this filing as proposed rule text. However, in Exhibit 
3 to this filing, the Exchange has provided a document that shows 
only the differences between the STOC rules as originally proposed 
in SR-CBOE-2004-21 and how they would be revised by the instant 
proposal.
    \5\ Securities Exchange Act Release No. 53829 (May 18, 2006), 71 
FR 30038 (May 24, 2006).
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    As previously mentioned, all quotes on the system would be firm and 
available for immediate and automated execution at all times unless the 
execution would cause an impermissible trade-through. There would be no 
``manual'' mode or quotes. Accordingly, CBOE's quotations would always 
be ``automated'' for purposes of Rule 600(b)(4). This is made clear in 
proposed Rule 52.13(a). If CBOE were to experience a technical failure, 
it would cease disseminating quotations (as opposed to disseminating 
``manual'' quotations).
    The Exchange also proposes to modify the definition and handling of 
IOC orders to make clear that IOC orders routed to CBOE would either be 
immediately executed (in part or in full) or canceled. Such orders 
would not be ``held up'' for manual processing or for potential price 
improvement above CBOE's disseminated quote. The revised definition, 
which sets forth the manner in which these orders will be handled, is 
contained in proposed Rule 51.8(g)(4). To allow other industry 
participants to comply with the requirements of Rule 600(b)(30) of 
Regulation NMS, which explains the manner in which ISOs must be routed, 
the Exchange is proposing to adopt ISO functionality so that ISO orders 
routed to CBOE would be automatically executed without regard for 
better prices displayed by other trading centers. Proposed Rule 51.8(n) 
spells out the Exchange's definition of ISOs. The Exchange would also 
provide technical specifications on its Web site to allow other market 
participants to access CBOE's protected quotations and to transmit ISOs 
to CBOE. Thus, upon activation of the system, CBOE would receive and 
process IOC and ISO orders consistent with Regulation NMS before the 
actual applicable compliance dates are reached.
    The proposed rules also would incorporate additional language 
relating to Regulation NMS but that may not be a necessary component of 
the Specifications Date deadline. More specifically, the Exchange is 
proposing to add language providing that: (1) Members should reasonably 
avoid displaying quotations that lock or cross protected quotations 
from other trading centers; (2) the Exchange may avail itself of the 
``self-help'' exception contained in Rule 611(b)(8) of Regulation NMS; 
and (3) when sufficient functionality is available on CBOE, that the 
Exchange would route orders to trading centers displaying better-priced 
protected quotations on behalf of orders routed to CBOE using ``private 
front-door'' connectivity as opposed to via the ITS Plan or any 
successor to the ITS Plan.\6\ This ``Routing Service'' would be 
provided directly and automatically by CBOE pursuant to several 
contractual agreements referenced in proposed Rule 52.10.
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    \6\ Prior to that time, however, CBOE would access better priced 
quotes through the ITS Plan (or its successor). By way of example, 
if CBOE receives a market order to sell 1000 shares while CBOE's bid 
is $50 for 500 shares and Exchange A's bid is 50.02 for 200 shares 
and Exchange B's bid is 50.01 for 400 shares, and assuming CBOE 
Market-Makers do not match the 50.02 NBBO, then the order will route 
to the DPM for handling. The DPM's handling options include the 
following: (i) route 1000 shares to Exchange A; (ii) route 200 to 
Exchange A and 400 to Exchange B while concurrently executing 400 on 
CBOE at 50; or (iii) route 200 to Exchange A and price improve 800 
on CBOE at 50.01. Note that, if a better price becomes available 
prior to the DPM routing away, such better price must be taken into 
account by the DPM.
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    The Exchange anticipates making additional enhancements to its non-
option trading platform prior to the

[[Page 50482]]

February 2007 compliance date for Regulation NMS that are not related 
to the requirements of the Specifications Date.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with the Act 
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.\7\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \8\ requirements 
that the rules of an exchange be designed to promote just and equitable 
principles of trade and to protect investors and the public interest.
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    \7\ 15 U.S.C. 78(f)(b).
    \8\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change would impose no 
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 by the Exchange on 
this proposal.

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 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 Exchange consents, the Commission will:
    (A) By order approve the 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-2006-70 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-2006-70. 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 Number 
SR-CBOE-2006-70 and should be submitted on or before September 15, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-14127 Filed 8-24-06; 8:45 am]
BILLING CODE 8010-01-P