[Federal Register Volume 73, Number 41 (Friday, February 29, 2008)]
[Notices]
[Pages 11168-11170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-3798]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57367; File No. SR-CBOE-2007-120]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to Market-Makers and Remote Market-Makers

February 21, 2008.
    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 October 11, 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 Exchange. On February 13, 2008, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment 1 replaced the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE rules relating to Market-Makers and 
Remote Market-Makers (``RMMs''). The text of the rule proposal is 
available on the Exchange's Web site (http://www.cboe.org/legal), at 
the Exchange's Office of the Secretary and at the Commission's Public 
Reference Room.

[[Page 11169]]

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 proposes to amend CBOE rules relating to Market-Makers and 
RMMs. In particular, CBOE proposes to: (i) Delete reference to RMMs in 
its rules; (ii) amend CBOE Rule 8.3 and CBOE Rule 8.7 relating to the 
appointment of Market-Makers and Market-Maker obligations, 
respectively; and (iii) update or delete outdated provisions in other 
rules, including CBOE Rule 8.3A relating to Class Quoting Limits 
(``CQLs'').
    CBOE proposes to delete CBOE Rule 8.4 and, as a result, individuals 
and member organizations that are registered as RMMs would be 
considered Market-Makers under CBOE's rules.\4\ RMMs were established 
in 2005 to allow market participants the ability to stream electronic 
quotations from a location outside of the physical trading station for 
an option class. At the time, Market-Makers were restricted from 
submitting electronic quotations from a location outside of the 
physical trading station. Over time, CBOE has amended its rules to 
permit Market-Makers to create a virtual trading crowd appointment and 
submit electronic quotations away from CBOE's trading floor in a 
Market-Maker's appointed classes. While on the trading floor, a Market-
Maker is not required to be present in the trading station where a 
class is located in order to stream electronic quotations into the 
class.\5\
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    \4\ In connection with this change, CBOE proposes to make 
related changes to CBOE Rules 3.2, 3.3, 6.45A, 6.45B, 8.7, 8.13, 
8.85, and 8.92 which reference the term RMM, and delete Rule 8.61, 
which pertains to the evaluation of RMMs.
    \5\ See CBOE Rule 8.3(c)(vi).
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    The obligations of Market-Makers and RMMs are generally the same, 
and Market-Makers in Hybrid and Hybrid 2.0 option classes can function 
remotely if they choose. Additionally, the ``appointment costs'' and 
transaction fees of RMMs and Market-Makers are identical. Accordingly, 
CBOE does not see any reason to continue to maintain a category of 
market participant called RMM.
    In connection with the deletion of the reference to RMMs, CBOE 
proposes to amend the definition of Market-Maker to include member 
organizations. Currently, an RMM can be either an individual or a 
member organization. Under CBOE Rule 8.1, however, a Market-Maker is 
defined as an individual (either a member or a nominee of a member 
organization) registered with CBOE for the purpose of making 
transactions as dealer-specialist on CBOE in accordance with the 
provisions of Chapter VIII. Therefore, CBOE proposes to amend the 
definition of Market-Maker to include member organizations. CBOE also 
proposes to amend CBOE Rule 3.3 to clarify that the member organization 
membership statuses that are approved by the Membership Committee 
include Market-Maker.\6\
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    \6\ Interpretation .02 of CBOE Rule 3.3 is also proposed to be 
amended to include reference to Lead Market-Maker.
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    CBOE also proposes to delete Interpretation and Policy .02 to CBOE 
Rule 3.8, and amend CBOE Rule 3.8(a)(ii) to allow any member 
organization that is the owner or lessee of more than one membership to 
designate one individual to be the nominee for all memberships utilized 
by the organization. However, for each membership utilized for trading 
in open outcry on the trading floor, the organization must designate a 
different individual to be the nominee for each of the memberships. 
Currently, only RMMs, e-DPMs and Off-Floor DPMs are permitted to 
designate one individual to be the nominee for all memberships utilized 
by the organization. CBOE believes it is appropriate to allow any 
member organization to designate one individual to be the nominee for 
all memberships utilized by the organization, and if any of the 
memberships are utilized for trading in open outcry on the trading 
floor, the organization must designate a different individual to be the 
nominee for each of the memberships.
    CBOE also proposes to update and amend CBOE Rule 8.3 pertaining to 
the appointment of Market-Makers. First, CBOE proposes to amend 
paragraph (a) of CBOE Rule 8.3 to provide that appointments can be 
selected by Market-Makers or made by CBOE consistent with the factors 
set forth in paragraph (a). Second, CBOE proposes to amend paragraph 
(c)(ii) to delete the requirement that a Market-Maker may hold an 
appointment in an appropriate number of Hybrid option classes that are 
located at one trading station. This limitation which requires that 
appointments in Hybrid option classes must be located at one trading 
station is not necessary. Moreover, since all option classes are either 
Hybrid 2.0 option classes or Hybrid 3.0 option classes, it is 
irrelevant.
    Third, CBOE proposes to amend and reorganize paragraph (c)(vii) of 
CBOE Rule 8.3 pertaining to the two current pilot programs that are in 
effect, and also to extend for an additional year the pilot programs. 
Specifically:
     Proposed new subparagraph (1) of CBOE Rule 8.3(c)(vii) 
describes the existing pilot program which allows an e-DPM or Off-Floor 
DPM to have one affiliated Market-Maker trade on CBOE's trading floor 
and submit electronic quotations in any specific option class allocated 
to the e-DPM or Off-Floor DPM, provided such affiliated Market-Maker 
trades on a separate membership and is present in the trading crowd 
(see CBOE Rules 8.85(a)(v) and 8.93(vii)). As noted above, CBOE also 
proposes to extend for an additional year, until March 14, 2009, this 
pilot program, as it believes that the pilot program has been 
successful, and CBOE has not experienced any negative effects with 
respect to the pilot program.
     Proposed new subparagraph (2) of CBOE Rule 8.3(c)(vii) 
maintains the existing pilot program which permits an RMM to have one 
affiliated Market-Maker trade in open outcry and submit electronic 
quotations in any specific option class in which the Market-Maker holds 
an appointment, provided such affiliated Market-Maker trades on a 
separate membership (see CBOE Rule 8.4(c)(i)). However, because CBOE is 
deleting reference to RMMs, subparagraph (2) of CBOE Rule 8.3(c)(vii) 
states that a Market-Maker in a class may have one affiliated Market-
Maker trade in open outcry and submit electronic quotations in any 
specific option class in which the Market-Maker holds an appointment, 
provided such affiliated Market-Maker trades on a separate membership 
and is present in the trading crowd. As noted above, CBOE proposes to 
extend for an additional year, until March 14, 2009, the pilot program, 
as CBOE believes that it has been successful, and CBOE has not 
experienced any negative effects with respect to the pilot program.
     Proposed new subparagraph (3) of CBOE Rule 8.3(c)(vii) 
provides that there is no restriction on (a) affiliated

[[Page 11170]]

Market-Makers holding an appointment and submitting electronic 
quotations in the same class, provided CBOE uses an allocation 
algorithm in the class that does not allocate electronic trades, in 
whole or in part, in an equal percentage based on the number of market 
participants quoting at the best bid or offer; or (b) affiliated 
Market-Makers holding an appointment in the same class for purposes of 
trading in open outcry.
     Proposed new subparagraph (4) of CBOE Rule 8.3(c)(vii) 
simply restates the multiple aggregation unit pilot program currently 
applicable to RMMs (see CBOE Rule 8.4(c)(ii)) and Market-Makers (see 
CBOE Rule 8.3(c)(viii)). CBOE also proposes to extend for an additional 
year, until March 14, 2009, the pilot program. CBOE believes that the 
pilot program has been successful, and CBOE has not experienced any 
negative effects with respect to the pilot program.
    With regard to the obligations of Market-Makers, CBOE proposes to 
amend CBOE Rule 8.7 to delete references to RMMs and other outdated 
references to appointed trading stations. Additionally, CBOE proposes 
to delete reference to DPMs representing orders as agent in CBOE Rule 
8.7(d)(i)(C), as DPMs cannot act as an agent for orders (see Rule 
8.85(c)).
    CBOE also proposes to update CBOE Rule 8.3A pertaining to CQLs. 
CBOE proposes to amend paragraph (a) to state that the DPM and e-DPMs 
(if applicable) assigned to a product and Market-Makers who hold an 
appointment in the product are entitled to quote electronically in the 
product for as long as they maintain an appointment in the product. 
CBOE proposes to amend paragraphs (b) and (c) to delete reference to 
March 18, 2005, and also to provide that any Market-Maker holding an 
appointment in a product prior to its addition to the Hybrid 2.0 
Platform or Hybrid Trading System, respectively, will be entitled to 
quote electronically in the product. Finally, CBOE proposes to delete 
existing Interpretation .02, as it is outdated.
2. Statutory Basis
    The Exchange believes the rule proposal 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.\7\ Specifically, the Exchange believes that the 
proposed rule change is consistent with the requirements under Section 
6(b)(5) of the Act \8\ that the rules of an exchange be 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 will 
impose any burden on competition 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 Exchange neither solicited nor received comments on the 
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 CBOE 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 Number SR-CBOE-2007-120 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-2007-120. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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-2007-120 and should be 
submitted on or before March 21, 2008.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-3798 Filed 2-28-08; 8:45 am]
BILLING CODE 8011-01-P