[Federal Register Volume 73, Number 166 (Tuesday, August 26, 2008)]
[Notices]
[Pages 50376-50379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-19706]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 58387; File No. SR-CBOE-2008-83]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to Complex Order Price Check Parameters

August 19, 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 August 19, 2008, the Chicago Board Options Exchange, Incorporated 
``Exchange'' or (``CBOE'') 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 prepared by the 
Exchange. The Exchange filed the proposal as a (``non-controversial'') 
proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.53C, Complex Orders on the 
Hybrid System, to codify an automated system feature that prevents 
complex order executions from occurring at potentially erroneous 
prices. The text of the proposed rule change 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.

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 self-regulatory organization 
included

[[Page 50377]]

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 those 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 parts of 
such statements.

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

1.Purpose
    Complex orders that are eligible for automatic execution through 
the CBOE's electronic complex order book (``COB'') may be automatically 
executed in accordance with the provisions of Rule 6.53C. Complex 
orders that are not eligible to route to COB route to PAR. The purpose 
of the proposed rule change is to amend Rule 6.53C to codify a 
description of new complex order price check parameter functionality, 
which is a functionality that could be activated in certain series of a 
given options class that would prevent an automatic execution of a 
complex order from occurring at a potentially erroneous price. The 
complex order price check parameter is designed to help maintain a fair 
and orderly market. The functionality would prevent executions from 
automatically occurring in three types of scenarios:
Market Width Scenarios
    COB would not automatically execute complex orders that are market 
orders if (i) the width between the Exchange's best bid and best offer 
in any individual series leg is not within an acceptable price range, 
or (ii) the width between the Exchange's best net priced bid and best 
net priced offer in the individual series legs comprising the complex 
order is not within an acceptable price range. The applicable price 
ranges will be determined by the Exchange on an individual series leg 
basis for each series comprising the complex order and on a net price 
basis based on the sum of each individual series leg of the complex 
order, as applicable, and will be announced to the membership via 
Regulatory Circular generally at least one day in advance. For purposes 
of this provision, an ``acceptable price range'' shall be based on no 
less than 1.5 times the corresponding bid/ask differentials for the 
individual series legs as set forth in Rule 8.7(b)(iv)(A).\5\ In 
addition, the Exchange is proposing that the senior official in CBOE's 
Control Room or two Floor Officials may grant intra-day relief by 
widening the acceptable price range. Any such intra-day changes will be 
announced to the membership when granted. Market orders (in whole or in 
part) that trigger the applicable complex order price check parameters 
and, thus, that are not eligible for automatic execution, will be 
routed on a class by class basis to PAR, BART, or at the order entry 
firm's discretion to the order entry firm's booth printer. Thus, if 
part of a market order may be executed within an acceptable price 
range, that part of the order will be executed automatically and the 
part of the order that would execute at a price outside the acceptable 
price range will be routed as described above.
---------------------------------------------------------------------------

    \5\ Rule 8.7(b)(iv)(A) sets forth the bid/ask differentials for 
open outcry trading in an individual series, which are as follows: 
No more than $0.25 between the bid and offer for each option 
contract for which the bid is less than $2, no more than $0.40 where 
the bid is at least $2 but does not exceed $5, no more than $0.50 
where the bid is more than $5 but does not exceed $10, no more than 
$0.80 where the bid is more than $10 but does not exceed $20, and no 
more than $1.00 where the bid is more than $20.
---------------------------------------------------------------------------

    For illustrative purposes, assume the Exchange determines to set a 
price check parameter for the series of a class that provides that 
complex orders would not automatically execute if they are market 
orders and (i) the width between the Exchange's best bid and best offer 
in any individual series leg is 2 x the standard bid/ask differential, 
or (ii) the width between the Exchange's best net bid and best net 
offer in the individual series legs is greater than or equal to 1.5 x 
the standard bid/ask differential for the individual series legs.\6\

    \6\ Following from the example above, on an intra-day basis the 
senior official or two Floor Officials may determine based on market 
conditions to grant relief by widening the applicable individual 
series or net priced price check parameters (e.g., the ranges for 
the individual series and/or net priced price check parameters might 
be temporarily widened to 3 X).

    Example 1:  Assume a complex order to buy Series A and sell 
Series B is routed to COB. Also assume at that time the best bid and 
offer (``;BBO'' in Series A is $1.00-$1.60 (wider than the 2 X 
series parameter), the BBO in Series B is $3.00-$3.10 (within the 2 
X series parameter). Because the bid/ask differential in Series A 
($0.60) is greater than 2 X the applicable standard bid/ask 
differential for the series,\7\ the price check parameter will be 
triggered. The incoming complex order will not automatically execute 
in COB and will instead route to PAR, BART or the booth.
---------------------------------------------------------------------------

    \7\ 2 X the standard bid/ask differentials would be as follows: 
$0.50 between the bid and offer for each option contract for which 
the bid is less than $2, $0.80 where the bid is at least $2 but does 
not exceed $5, $1.00 where the bid is more than $5 but does not 
exceed $10, $1.60 where the bid is more than $10 but does not exceed 
$20, and $2.00 where the bid is more than $20.
---------------------------------------------------------------------------

    Example 2:  Assume a complex order to buy Series A and sell 
Series B is routed to COB. Also assume at the time the BBO in Series 
A is $1.00-$1.40 (within the 2 X series parameter), the BBO in 
Series B is $2.00 -$2.60 (within the 2 X series parameter). Because 
the net price bid/ask differential for the two series ($1.00) is 
greater than 1.5 x the applicable standard bid/ask differential for 
the series ($0.975), the price check parameter will be triggered. 
The incoming complex order will not automatically execute in COB and 
will instead route to PAR, BART or the booth.
    Example 3:  Assume a complex order to buy 50 Series A contracts 
and sell 50 Series B contracts is routed to COB. Also assume at that 
time the BBO in Series A is $1.00-$1.20 (within the 2 X series 
parameter) for 100 contracts, the BBO in Series B is $2.00-$2.20 
(within the 2 X series parameter) for 10 contracts, and the next 
available bid in Series B is $0.05 for 100 contracts. The incoming 
complex order would execute paying $1.20 for 10 Series A contracts 
and collecting $2.00 for 10 Series B contracts. When the market in 
Series B decrements to $0.05-$2.20, the price check parameter would 
be triggered for any one of three reasons: the width of Series B 
is$0.05-$2.20 (wider than the 2 X series parameter), the net price 
width of Series A and B is $2.35 (wider than the 2 X net price 
parameter of $1.30), and the net price has moved from a credit to 
debit (discussed below). The balance of the incoming complex order 
will route to PAR, BART or the booth.
Credit-to-Debit (Debit-to-Credit) Scenarios
    In classes designated by the Exchange, COB would not automatically 
execute market orders that would be executed at a net credit (debit) 
price after receiving a partial execution at a net debit (credit) 
price. The remaining balance of any such market orders that trigger 
this complex order price check parameters will be routed on a class by 
class basis to PAR, BART, or at the order entry firm's discretion to 
the order entry firm's booth printer. The designated classes for which 
this price check parameter is activated will be announced to the 
membership via Regulatory Circular.
    Example 3 above illustrates the operation of this parameter. In the 
example, the incoming order would initially receive an execution for 10 
spreads at a net credit price of $0.80 each (i.e., the net sale 
proceeds from Series B are larger than the net purchase cost from 
Series A). When the bid in Series B decrements to $0.05, the net 
execution price would become a net debit price of $1.15 each (i.e., the 
net sale proceeds from Series B are less than the net purchase cost 
from Series A). Such an execution would appear to be erroneous because 
normally a person in

[[Page 50378]]

this scenario would expect to execute its entire market order at a net 
credit price.
Vertical Scenarios
    In classes designated by the Exchange, COB would not automatically 
execute certain vertical complex orders \8\ that appear to be 
erroneously priced. This functionality is designed to detect and 
prevent executions in limited scenarios where (i) a market order would 
be executed at a net debit price when it clearly should be executed at 
a net credit price (but not vice versa),\9\ and (ii) a order is entered 
at a net credit price when it clearly should have been entered at a net 
debit price (or vice versa). Specifically, a market order that would 
trade at a net (debit) price or a complex order priced at net credit 
(debit) price that consists of at least two series legs would be 
automatically rejected by COB if the complex order would result in an 
execution to:
---------------------------------------------------------------------------

    \8\ As referenced herein, a ``vertical'' complex order is one in 
which all the component series have the same expiration date.
    \9\ A vertical market order that would result in an execution at 
a net credit price (i.e., the net sale proceeds from the series 
being sold are more than the net purchase cost from the series being 
bought) but that would normally execute at a net debit price (i.e., 
the net sale proceeds from the series being sold are less than the 
net purchase cost from the series being bought) would be a favorable 
execution for the market order and would not trigger this price 
check parameter.
---------------------------------------------------------------------------

     Buy (sell) a number of call option contracts and sell 
(buy) the same number or applicable ratio (as determined by the 
Exchange on a class by class basis) of call option contracts in a 
series with the same underlying security and expiration date but a 
higher exercise price; or
     Buy (sell) a number of put option contracts and sell (buy) 
the same number or applicable ratio (as determined by the Exchange on a 
class by class basis) of put option contracts in a series with the same 
underlying security and expiration date but a lower exercise price.
    As with the other price check parameters, the designated classes 
for which this parameter is activated, as well as any applicable ratio, 
will be announced to the membership via Regulatory Circular. If these 
conditions exist when an order is routed to COB, the complex order will 
be rejected. To the extent the parameters are triggered once an order 
is resting in COB or after an incoming order receives a partial 
execution, such complex orders will be routed on a class by class basis 
to PAR, BART, or at the order entry firm's discretion to the order 
entry firm's booth printer. The following examples illustrate this 
price check parameter:

    Example 1:  Assume a complex order to buy 50 Jan 45 XYZ calls 
and sell 50 Jan 50 XYZ calls is entered at a net credit price (i.e., 
the net sale proceeds from the Jan 50 calls are larger than the net 
purchase cost from the Jan 45 calls). Such an order would appear to 
be erroneously priced as a net credit--it should instead be a net 
debit--because normally a person would expect that the Jan 50 calls 
would not cost more than the Jan 45 calls.
    Example 2: Assume a butterfly spread to buy 50 Jan 45 XYZ calls, 
sell 100 Jan 50 XYZ calls and buy 50 Jan 55 XYZ calls is entered at 
a net credit price (i.e., the net sale proceeds from the Jan 50 
calls are more than the net purchase cost from the Jan 45 and 55 
calls). Such an order would appear to be erroneously priced as a net 
credit--it should instead be a net debit--because normally a person 
would expect that selling the middle 50 strike would result in less 
than the cost of buying the upper 55 and lower 45 strikes.
    Example 3:  Assume a market order to buy 50 Jan 45 XYZ calls and 
sell 50 Jan 40 XYZ calls is entered. Also assume that the Jan 45 XYZ 
calls are quoted $4.00-$4.10 for 10 contracts and the next available 
offer is $4.30 for 100 contracts, and that the Jan 40 XYZ calls are 
quoted $4.50-$4.60 for 10 contracts and the next available bid is 
$4.20 for 100 contracts. The incoming market order would receive an 
execution for 10 spreads at a net credit price of $0.40 each (i.e., 
the net sale proceeds from the Jan 40 Series are larger than the net 
purchase cost from the Jan 45 Series). When the series decrement, 
the net execution price would become a net debit price of $0.10 each 
(i.e., the net sale proceeds from the Jan 40 Series are less than 
the net purchase cost from the Jan 45 Series). Such an execution 
would appear to be erroneous because normally a person in this 
scenario would expect to execute the vertical spread at a net credit 
price.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \10\ and the rules and regulations under the Act applicable to 
national securities exchanges and, in particular, the requirements of 
section 6(b) of the Act.\11\ Specifically, the Exchange believes the 
proposed rule change is consistent with the section 6(b)(5) \12\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, to remove impediments to and to perfect the 
mechanism for a free and open market and a national market system, and, 
in general, to protect investors and the public interest. The proposed 
rule change will contribute to the maintenance of fair and orderly 
markets because it will provide an automated process for preventing 
potentially erroneous executions in complex orders from occurring.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(1).
    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\ At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-2008-83 on the subject line.

[[Page 50379]]

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2008-83. 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, 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-2008-83 and should be submitted on or before September 16, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Acting Secretary.
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

 [FR Doc. E8-19706 Filed 8-25-08; 8:45 am]
BILLING CODE 8010-01-P