[Federal Register Volume 72, Number 92 (Monday, May 14, 2007)]
[Notices]
[Pages 27156-27159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-9179]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55724; File No. SR-CBOE-2007-39]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Regarding Penny 
Price Improvement

May 8, 2007.
    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 April 24, 2007, 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, II, and III below, which Items have been substantially 
prepared by the CBOE. 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 CBOE proposes to amend its Rules regarding penny price 
improvement for options not currently quoted in one-cent increments. 
The text of the proposed rule change is set forth below. Proposed new 
language is italicized; and proposed deletions are [bracketed].
* * * * *

Rule 6.13B. Penny Price Improvement

    The Exchange may designate one or more options trading on the 
Hybrid System for inclusion in the Penny Price Improvement Program. 
Under this program, the Exchange will allow all users to provide price 
improvement beyond the Exchange's disseminated quotation (``Penny 
Pricing'') for classes or series that are not already quoted in one-
cent increments and for which the Simple Auction Liaison system in Rule 
6.13A is not in effect.
    (a) Electronic Penny Pricing. Electronic penny prices may be 
established as follows:
    (1) Market-Makers. Market-Makers may electronically provide the 
Exchange with indications of interest that are superior to their own 
quotations in increments no smaller than one-cent. Such indications 
shall be firm for all interest received by the Exchange. The Exchange 
shall disseminate such

[[Page 27157]]

interest using standard quoting increments by rounding the limit price 
to the nearest standard quoting increment that does not violate the 
limit price.
    (2) Orders. Public Customers and all other users may electronically 
submit to the Exchange orders priced in one-cent increments. The 
Exchange shall disseminate such orders using standard quoting 
increments by rounding the limit price to the nearest standard quoting 
increment that does not violate the limit price.
    All Penny Pricing submitted pursuant to (1) or (2) above shall be 
filed by the System for order allocation purposes but shall not be 
visible. The Exchange may append an indicator to its disseminated 
quotation to indicate the existence of Penny Pricing in the relevant 
side of a series when it exists, but no information regarding the price 
and size of the Penny Pricing shall be made available.
    If an order is received by the Hybrid System that could trade 
against Penny Pricing and where the Exchange's disseminated quotation 
is the NBBO, it will automatically execute against the Penny Pricing 
pursuant to the Exchange's normal allocation procedures.
    (b) Open Outcry Penny Pricing. Oral bids (offers) provided by in-
crowd market participants may be expressed in one-cent increments in 
response to an order represented in open outcry provided that: (1) The 
oral bids (offers) better the corresponding bid (offer) in the 
Exchange's disseminated quotation; and (2) any resulting transaction(s) 
is consistent with the requirements of Rule 6.83.
    The appropriate Procedure Committee may also determine on a class-
by-class basis to make the split-price priority provisions of Rule 6.47 
applicable to a class that is subject to Penny Pricing under this rule.
    For purposes of this rule, ``in-crowd market participants'' 
includes in-crowd Market-Makers, an in-crowd DPM or LMM, and Floor 
Brokers or PAR Officials representing orders in the trading crowd.
    (c) Prior to effecting any transactions in open outcry in one-cent 
increments, Exchange members must electronically ``sweep'' any Penny 
Pricing interest in the Hybrid System so as not to violate the priority 
of such Penny Pricing.
    (d) All pronouncements regarding the applicability of this rule 
will be announced to the membership via Regulator Circular.
* * * * *
Rule 6.45 Priority of Bids and Offers--Allocation of Trades
    Except as provided by Rules, including but not limited to Rule 
6.2A, 6.8, 6.9, 6.13, 6.13B, 6.45A, [Rule] 6.47, [Rule] 6.74, [Rule] 
8.87 and [CBOE] Exchange Regulatory Circulars approved by the [SEC] 
Commission concerning Participation Entitlements [Rights], the 
following rules of priority shall be observed with respect to bids and 
offers:
    (a)-(e) No change.
    * * * Interpretations and Policies:
    .01-.02 No change.
* * * * *
Rule 6.45A Priority and Allocation of Equity Option Trades on the CBOE 
Hybrid System
    6.45A Generally: No change.
    (a)-(e) No change.
    * * * Interpretations and Policies:
    .01 Principal Transactions: Order entry firms may not execute as 
principal against orders they represent as agent unless: (i) Agency 
orders are first exposed on the Hybrid System for at least three (3) 
seconds, (ii) the order entry firm has been bidding or offering for at 
least (3) seconds prior to receiving an agency order that is executable 
against such bid or offer, or (iii) the order entry firm proceeds in 
accordance with the crossing rules contained in Rule 6.74. This 
paragraph also shall apply to orders resting on the Hybrid System in 
penny increments pursuant to Rule 6.13B. In such cases, agency orders 
priced in penny increments are deemed ``exposed'' pursuant to (i) 
above, and order entry firm orders priced in penny increments are 
deemed bids or offers pursuant to (ii) above.
    .02 Solicitation Orders. Order entry firms must expose orders they 
represent as agent for at least three (3) seconds before such orders 
may be executed electronically via the electronic execution mechanism 
of the Hybrid System, in whole or in part, against orders solicited 
from members and non-member broker-dealers to transact with such 
orders. This paragraph also shall apply to agency orders resting on the 
Hybrid System in penny increments pursuant to Rule 6.13B. In such 
cases, agency orders priced in penny increments are deemed ``exposed'' 
pursuant to this paragraph.
* * * * *
Rule 6.45B Priority and Allocation of Trades in Index Options and 
Options on ETFs on the CBOE Hybrid System
    6.45B Generally: No change.
    (a)-(d) No change.
    * * * Interpretations and Policies:
    .01 Principal Transactions: Order entry firms may not execute as 
principal against orders they represent as agent unless: (i) Agency 
orders are first exposed on the Hybrid System for at least three (3) 
seconds, (ii) the order entry firm has been bidding or offering for at 
least (3) seconds prior to receiving an agency order that is executable 
against such bid or offer, or (iii) the order entry firm proceeds in 
accordance with the crossing rules contained in Rule 6.74. This 
paragraph also shall apply to orders resting on the Hybrid System in 
penny increments pursuant to Rule 6.13B. In such cases, agency orders 
priced in penny increments are deemed ``exposed'' pursuant to (i) 
above, and order entry firm orders priced in penny increments are 
deemed bids or offers pursuant to (ii) above.
    .02 Solicitation Orders. Order entry firms must expose orders they 
represent as agent for at least three (3) seconds before such orders 
may be executed electronically via the electronic execution mechanism 
of the Hybrid System, in whole or in part, against orders solicited 
from members and non-member broker-dealers to transact with such 
orders. This paragraph also shall apply to agency orders resting on the 
Hybrid System in penny increments pursuant to Rule 6.13B. In such 
cases, agency orders priced in penny increments are deemed ``exposed'' 
pursuant to this paragraph.
* * * * *
    Rule 6.47. Priority on Split-Price Transactions Occurring in Open 
Outcry
    (a)-(c) No change.
    * * * Interpretations and Policies:
    .01 No change.
    .02 The availability of split-price priority when an order is 
executed in a one-cent increment pursuant to Rule 6.13B shall be 
determined in accordance with Rule 6.13B(b).
* * * * *
Rule 6.74. Crossing Orders
    (a)-(f) No change.
    * * * Interpretations and Policies:
    .01-.08 No change.
    .09 For purposes of paragraphs (a), (b), and (d), the minimum 
increment for bids and offers shall be one cent for orders that are 
subject to the open outcry penny price improvement under Rule 6.13B. 
Open outcry penny price improvement under Rule 6.13B shall not be 
available for orders executed pursuant to paragraphs (c) and (f).
* * * * *

[[Page 27158]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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 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 purpose of this filing is to allow Exchange users the expanded 
ability to effect transactions in penny increments in classes and/or 
series trading on CBOE's Hybrid System that are not already quoting in 
penny increments.\3\ The Exchange would designate the classes/series 
eligible for this penny pricing, and the penny pricing would be 
available electronically and in open outcry. As proposed, all limit 
orders electronically sent to CBOE (regardless of sender origin type) 
could be expressed in a one-cent increment. The Exchange would round 
the limit price to the nearest permissible quoted increment for display 
purposes, but would maintain the one-cent increment limit price for 
trade allocation purposes. For example, the CBOE market is 1-1.20 and 
an order is received to buy 10 contracts at 1.08. CBOE would 
disseminate a 1.05 bid for 10 contracts, and any subsequent sell market 
order received by the Exchange would trade at 1.08 for up to 10 
contracts (after that, the quote would revert back to 1-1.20).\4\
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    \3\ In File No. SR-CBOE-2006-42, the Exchange proposed to allow 
penny price improvement in open outcry. That filing has been 
withdrawn and most of its provisions have been incorporated into 
this filing, which also contemplates electronic penny price 
improvement.
    \4\ The Exchange has represented that the system would not 
execute an order at a price that would cause a trade-through of 
another options exchange.
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    An Exchange Market-Maker could also provide the Exchange with 
indications to trade in one-cent increments that improve on the Market-
Maker's disseminated quotation. To the extent there is trading interest 
from multiple sources at the same one-cent increment price, priority 
will be established in the exact same manner as priority at a standard 
quoting increment (i.e., normal allocation procedures are used). The 
Exchange may attach an indicator to its publicly disseminated quote 
indicating the existence of penny pricing for the series, but the size 
and price of any penny pricing will not be displayed or made available 
to anyone. If the indicator feature is activated, it will apply to all 
classes/series participating in the penny pricing program.
    With respect to open outcry, crowd members would be able to provide 
price improvement in one-cent increments over the Exchange's Best Bid 
or Offer (``BBO''). The Exchange has represented that any resulting 
trade would not cause a trade-through of another options exchange. 
Further, prior to executing any order in open outcry in one-cent 
increments, members would be required to electronically ``sweep'' any 
penny pricing interest that may exist. The ``sweep'' would ensure that 
better-priced orders resting in one-cent increments are executed prior 
to the open outcry transaction and would also ensure that same priced 
orders receive executions consistent with existing rules governing 
priority of orders in the Hybrid book when trading with an order 
represented in open outcry (CBOE Rules 6.45A(b) and 6.45B(b)).
    The applicability of split-price priority under CBOE Rule 6.47 to 
transactions effected under proposed CBOE Rule 6.13B would be 
determined by the appropriate option procedure committee, and the 
mechanics of split-price priority in those instances would be the same 
as the mechanics of split-price priority in five- and ten-cent 
increments.
    In addition, open outcry penny pricing would generally be available 
in instances where a Floor Broker is attempting to cross an order 
pursuant to CBOE Rule 6.74. However, it would not be available in those 
instances where (i) a Floor Broker is attempting to cross orders during 
the opening rotation in open outcry \5\ or (ii) a Floor Broker is 
utilizing the Exchange's SizeQuote Mechanism.\6\
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    \5\ See CBOE Rule 6.74(c), which provides procedures for a floor 
broker to cross orders during the opening rotation for a class of 
options.
    \6\ See CBOE Rule 6.74(f), which describes the SizeQuote 
Mechanism.
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    Lastly, the restrictions contained in Interpretations and Policies 
.01 and .02 under CBOE Rules 6.45A and 6.45B would continue to apply to 
trading in penny increments, including the 3-second exposure 
requirements, contained in those Interpretations and Policies.
2. Statutory Basis
    The Exchange believes that 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 facilitate transactions in securities, to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, and, in general, to protect investors 
and the public interest. In particular, the Exchange believes that the 
proposal will provide an opportunity for customers to receive price 
improvement on their orders.
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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 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 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

[[Page 27159]]

No. SR-CBOE-2007-39 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-2007-39. 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 at 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-2007-39 and should be submitted on or before June 4, 2007.

    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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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-9179 Filed 5-11-07; 8:45 am]
BILLING CODE 8010-01-P