[Federal Register: March 3, 2004 (Volume 69, Number 42)]
[Notices]
[Page 10085-10087]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03mr04-134]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49318; File No. SR-CBOE-2004-10]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Inc., Relating to the Expansion of the $5 Bid-Ask
Differential Pilot Program
February 25, 2004.
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 February 20, 2004, the Chicago Board Options Exchange, Inc.
(``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.
The CBOE has submitted the proposed rule change under section
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which
renders the proposal effective upon filing with the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In January 2004, the CBOE implemented a six-month pilot program
(``Pilot Program''), which expires on June 29, 2004, that permits quote
spread parameters of up to $5, regardless of the price of the bid, for
up to 200 option classes traded on the CBOE's Hybrid Trading System
(``Hybrid'').\5\ The CBOE proposes to amend its rules to expand the
Pilot Program to include all option classes traded on Hybrid.
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\5\ See Securities Exchange Act Release No. 49153 (January 29,
2004), 69 FR 5620 (February 5, 2004) (notice of filing and immediate
effectiveness of File No. SR-CBOE-2003-50) (``Pilot Notice'').
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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
The Pilot Program, which expires on June 29, 2004, permits quote
spread parameters of up to $5, regardless of the price of the bid, for
up to 200 option classes traded on Hybrid. The purpose of the proposed
rule change is to expand the Pilot Program to include all option
classes traded on Hybrid.\6\ As a condition to the effectiveness of the
Pilot Program, the CBOE committed to monitor the quotation quality of
all classes in the Pilot Program and, based on the results, recommend
either relaxing the spread requirements for all Hybrid classes, ending
the Pilot Program, or adjusting the spread requirements for all Hybrid
classes. To this end, the CBOE committed to prepare and submit to the
Commission a report assessing the operation of the Pilot Program and,
in particular, the quality of the quotations for the Pilot Program
options.\7\
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\6\ As of February 17, 2004, approximately 550 classes traded on
Hybrid.
\7\ In this respect, the CBOE committed to provide to the
Commission a report analyzing the Average Quote Width Analysis
(``AQWA'') scores for each of the Pilot Program options. The CBOE's
report will compare the AQWA scores for each stock prior to the
implementation of the Pilot Program versus the AQWA scores for each
stock during the operation of the Pilot Program. The CBOE believes
that this information will provide a meaningful comparison during
the relevant periods so that the CBOE will be able to determine the
effect of the $5 quote width on quote quality. The CBOE expects to
provide the Commission with its report on the Pilot Program by June
15, 2004. Telephone conversation between Steve Youhn, CBOE, and
Yvonne Fraticelli, Special Counsel, Division of Market Regulation,
Commission, on February 19, 2004.
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The CBOE proposes to expand the number of option classes included
in the Pilot Program from 200 classes to all classes trading on Hybrid.
As proposed, any class trading on Hybrid would be eligible for
inclusion in the Pilot Program, which means that when the proposal
becomes operative, the permissible bid-ask differential for all Hybrid
series will be $5, regardless of the price at which they trade.\8\
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\8\ The relaxed quotation spread requirements will apply after
the opening trading rotation. During the opening rotation, market
makers will be required to quote in accordance with the traditional
bid-ask width requirements. The $5 quotation requirements permitted
under the Pilot Program would become operative immediately following
the opening rotation.
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As described above, the CBOE previously committed to prepare and
submit to the Commission a report assessing the operation of the Pilot
Program. The CBOE further commits to expand the scope of this report to
include the top 550 Hybrid classes. The report will analyze the AQWA
scores for the Pilot Program options and will include data from the
date of inclusion in the Pilot Program through June 1, 2004.\9\
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\9\ See note 7, supra, for a description of the information that
the CBOE will include in its Pilot Program report. When the current
proposal becomes operative, the CBOE will add to the 200 classes
currently included in the Pilot Program all of the remaining classes
currently traded on Hybrid (approximately 350 classes). If after the
operative date of the current proposal the CBOE converts additional
classes to Hybrid trading, those classes will be eligible for
inclusion in the Pilot Program. However, the CBOE will not include
data for these additional classes in its Pilot Program report to the
Commission. The CBOE proposes to exclude this information from the
report because these classes may be added to Hybrid at different
times (and some may not be added until near the end of the Pilot
Program), which would result in separate measurement periods for
each class and would necessarily complicate the preparation of the
Pilot Program report. Moreover, the CBOE believes that it is
unlikely that data provided for this relatively small number of
classes would produce significant additional information concerning
the operation of the Pilot Program.
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The CBOE believes that it is reasonable to expand the Pilot Program
to include all Hybrid classes. In this
[[Page 10086]]
regard, the CBOE notes that the Hybrid market structure creates strong
incentives for competing market makers and other market participants to
disseminate competitive prices. In Hybrid, each market maker quotes
independently and customers and broker-dealers can enter limit orders
in the limit order book at prices better than those posted by market
makers. The Exchange automatically collects this trading interest
information, calculates the CBOE best bid and offer, and disseminates
that value to the Options Price Reporting Authority. Accordingly, the
CBOE believes that the CBOE Hybrid market is competitive, accessible
and transparent.
The CBOE notes that market participants in Hybrid have strong
incentives to quote competitively. The CBOE allocates incoming orders
based on the price and size of orders and quotes resting in the book.
Under the CBOE's Ultimate Matching Algorithm, the larger the size of a
market maker's quote at the best price, the greater the size of the
allocation he or she receives. Conversely, if a market participant does
not quote at the best price, the market participant will not
participate in any electronic trade allocations. The CBOE believes,
moreover, that given NBBO protections in place at each exchange as well
as through the Options Market Linkage plan, market participants have
even stronger incentives to quote at the best price, lest incoming
orders be filled away. Thus, the CBOE believes that inter- and intra-
market competitive forces provide strong incentives for market
participants to quote competitively and enter quotes and orders that
improve the price and depth of the market.
For these reasons, the CBOE believes that it is reasonable to
expand the Pilot Program to include all Hybrid classes.
2. Statutory Basis
The 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.\10\ Specifically, the CBOE believes the
proposed rule change is consistent with the section 6(b)(5) \11\
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts and, in general, to protect investors and the public
interest.
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The 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
No written comments were solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The CBOE has filed the proposed rule change pursuant to section
19(b)(3)(A) of the Act \12\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\13\ Because the foregoing proposed rule change: (1) Does
not significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
and (3) does not become operative for 30 days, or such shorter time as
the Commission may designate, and the CBOE provided the Commission with
written notice of its intent to file the proposed rule change at least
five business days prior to the filing date, the proposed rule change
has become effective pursuant to section 19(b)(3)(A) of the Act and
Rule 19b-4(f)(6) thereunder.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of filing.
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. The CBOE has requested that the
Commission waive the 30-day operative delay to allow the CBOE to expand
the Pilot Program to include all Hybrid classes without delay. The CBOE
notes that its Pilot Program is similar to a pilot program adopted by
the International Securities Exchange, Inc. (``ISE'').\14\
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\14\ See Securities Exchange Act Release No. 47352 (March 19,
2003), 68 FR 14728 (March 26, 2003) (order approving File No. SR-
ISE-2001-15). The ISE's pilot program has been extended through
March 31, 2004. See Securities Exchange Act Release No. 49149
(January 29, 2004), 69 FR 5627 (February 5, 2004) (notice of filing
and immediate effectiveness of File No. SR-ISE-2004-02, extending
the ISE's pilot program through March 31, 2004). See also Securities
Exchange Act Release No. 48514 (September 22, 2003), 68 FR 55685
(September 26, 2003) (notice of filing and immediate effectiveness
of File No. SR-ISE-2003-21, extending the ISE's pilot program
through January 31, 2004). The ISE also has filed a proposal with
the Commission seeking permanent approval of its pilot program and
extending its pilot program to apply to all equity options listed on
the ISE. See File No. SR-ISE-2003-22.
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The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public
interest.\15\ Specifically, the Commission believes that allowing the
CBOE to expand its Pilot Program to include all option classes trading
on Hybrid will permit a larger number of option classes to be included
in the Pilot Program, thereby helping the CBOE to assess the effects of
the $5 spreads permitted under the Pilot Program. In this regard, the
Commission notes that the CBOE's report concerning the Pilot Program
will include data from 550 option classes traded on Hybrid. The
Commission believes that the CBOE's proposal raises no new issues or
regulatory concerns that the Commission did not consider in approving
the ISE's quote spread pilot program or in permitting the CBOE to
implement its Pilot Program.\16\ For these reasons, the Commission
designates that the proposal become operative immediately.
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\15\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\16\ See Pilot Notice, supra note 5.
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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.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
Comments may also be submitted electronically at the following e-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. SR-CBOE-2004-10. 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, your comments should be sent in
hardcopy or by e-mail but not by both methods.
Copies of the submission, all subsequent amendments, all written
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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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the CBOE. All
submissions should refer to File No. SR-CBOE-2004-10 and should be
submitted by March 24, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4663 Filed 3-2-04; 8:45 am]
BILLING CODE 8010-01-P