[Federal Register: October 31, 2007 (Volume 72, Number 210)]
[Notices]
[Page 61694-61696]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc07-137]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56701; File No. SR-CBOE-2007-68]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by
Amendment No. 1, Regarding Complex Orders
October 25, 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 June 20, 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 prepared
substantially by the CBOE. On October 19, 2007, the CBOE 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 modified by Amendment No. 1, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaces the original filing in its
entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to amend its rules regarding the handling of
certain complex orders. The text of the proposed rule change is
[[Page 61695]]
http://www.cboe.org/Legal), at the CBOE'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 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 Rule 6.53C, ``Complex Orders on the Hybrid System,'' governs
the electronic handling and execution of complex orders by the
Exchange's Hybrid System. The purpose of this filing is to allow for
the electronic handling and execution of stock-option orders on the
Exchange. These are a type of complex order that consist of an option
component and a stock component. Stock-option orders are popular with
investors (e.g., buy-writes) and are frequently handled on CBOE. To
date, these orders are handled manually and the option component is
traded in open outcry by a broker. With the establishment of the CBOE
Stock Exchange (``CBSX''), an electronic stock trading facility of
CBOE, the Exchange is now positioned to handle and trade stock-option
orders electronically, with the stock component execution taking place
on CBSX.
The Exchange proposes to handle these orders in a manner that is
substantially similar to other complex orders handled pursuant to CBOE
Rule 6.53C. Electronic stock-option orders will be accepted by the
Hybrid System and auctioned in the Complex Order Auction (``COA'')
pursuant to CBOE Rule 6.53C(d) when the requirements for an auction are
met. An unexecuted stock-option order can also be maintained by the
system (either in the Complex Order Book (``COB'') or on the PAR
workstation), either of which will monitor the marketability of the
order, taking into account the CBSX market for the execution of the
stock component of the order.
There are four differences between the handling of stock-option
orders and other complex order types handled pursuant to CBOE Rule
6.53C. First, as previously mentioned, the stock portion of the stock-
option order will be executed on CBSX. All such executions will be
consistent with CBSX trading rules, including priority and matching
rules. The execution of the stock-option order cannot take place until
the desired price of the stock component is achievable on CBSX. The
option leg of the stock-option order will not trade ahead of any
resting public customer orders on the Hybrid book. This is consistent
with existing CBOE Rule 6.45A(b)(ii), which provides that stock-option
orders do not have priority over bids/offers in the public customer
limit order book. The option leg may be executed in one-cent increments
regardless of the minimum increment applicable to the series.
For example: a customer enters a buy-write order to buy 100 shares
of XYZ (trading around $40) and sell a 45 call with a net price of
$39.00. There is a public customer order in the Hybrid book to sell the
45 call for $1. When executing the buy-write against auction responses,
the system will not allow the option leg of the transaction to trade at
$1 or higher (thereby preserving the resting limit order's priority at
that price). An execution could occur where the option leg prints at
$0.99 and the stock trade prints at $39.99 (in accordance with CBSX
priority rules). This meets the buy-write's limit price (involving a
total cost of $3900) and does not violate priority on CBOE or CBSX.
Second, the execution of a stock-option order submitted to the COB
is slightly different than the priority outlined in CBOE Rule
6.53C(c)(ii). More specifically, a stock-option order submitted to the
CBOE will trade in the following sequence: (1) Against other stock-
option orders in the COB using public customer priority and then time
priority (thus, if there are multiple public customer and broker-dealer
stock-option orders resting in COB, the public customer orders will
trade first with time priority among them, and then the broker-dealer
orders will trade with time priority among them); (2) against
individual orders or quotes on the Exchange (i.e., the CBSX book and
the options Hybrid book), provided the stock-option order can be
executed in full (or in a permissible ratio); and (3) against orders or
quotes submitted by Market Participants, as set forth in CBOE Rule
6.53C(c)(ii)(3). Because a portion of a stock-option order is executed
on a different platform (CBSX), it is more practical to execute resting
stock-option orders against other stock-option orders received by the
system first before scanning for executions against the legs on the
CBSX book and the options Hybrid book.
The third difference involves the manner in which stock-option
orders are executed through the COA. Individual orders and quotes for
the various legs of the order will have last priority. Again, this is
because it is more practical to execute resting stock-option orders
against other stock-option orders received by the system first before
scanning for executions against the legs on the CBSX book and the
options Hybrid book.
For example: the market for XYZ stock on CBSX is $39.94-39.99.
The 45 call market on CBOE is $0.95-1.00. A stock-option order is
entered to buy 100 shares and sell the 45 call with a net price of
$39.00. The stock-option order is auctioned through the COA, but no
responses are received (if responses had been received, priority
would have been afforded to public customer responses and any
resting public customer stock-option orders that were marketable
against the auctioned order using time priority). After the system
has determined that there are no responses or resting stock-option
orders that can trade against the auctioned stock-option order, it
will look to the individual leg markets. In this case, the stock-
option order will be filled by the system by executing the stock at
$39.99 against the CBSX book and the option at $1 against the CBOE
book.
With respect to the last difference, the N-second group timer shall
not be in effect for stock-option orders.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\4\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\5\ 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, in general, to protect investors and the public
interest. In particular, the Exchange believes that the addition of
stock-option orders to the list of complex orders eligible for
electronic handling under CBOE Rule 6.53C is a significant enhancement
for investors seeking automated handling of stock-option orders.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78f(b).
\5\ 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 that is not
[[Page 61696]]
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 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 rule-comments@sec.gov. Please include
File Number SR-CBOE-2007-68 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-2007-68. 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 such filing also will be available for
inspection and copying at the principal office of the CBOE. 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-2007-68 and should be
submitted on or before November 21, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
---------------------------------------------------------------------------
\6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E7-21383 Filed 10-30-07; 8:45 am]
BILLING CODE 8011-01-P