[Federal Register: February 13, 2007 (Volume 72, Number 29)]
[Notices]
[Page 6796-6797]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe07-78]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55246; File No. SR-CBOE-2006-62]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of a Proposed Rule Change as
Modified by Amendment No. 1 Thereto Relating to Its Index Obvious Error
Rule
February 6, 2007.
I. Introduction
On July 7, 2006, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend CBOE Rule 24.16, which
is the Exchange's rule applicable to the nullification and adjustment
of transactions in index options, options on exchange-traded funds
(``ETFs''), and options on HOLDing Company Depository ReceiptS
(``HOLDRS''). On October 30, 2006, the CBOE submitted Amendment No. 1
to the proposed rule change. The proposed rule change, as amended, was
published for comment in the Federal Register on December 20, 2006.\3\
The Commission received no comment letters on the proposal. This order
approves the proposed rule change as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 54926 (December 13,
2006), 71 FR 76393.
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II. Description of the Proposed Rule Change
The Exchange is proposing to amend Rule 24.16 in order to: (i) re-
define what constitutes an ``obvious price error;'' (ii) provide for a
Market-Maker to Market-Maker adjustment of obvious price errors
(currently such erroneous transactions are subject to nullification);
(iii) eliminate the nullification and adjustments provisions for
erroneous quantity errors; and (iv) make various non-substantive
changes to the text of Rule 24.16.
Specifically, an ``obvious price error'' would be deemed to have
occurred for series trading with normal bid-ask differentials as
established in CBOE Rule 8.7(b)(iv) when the execution price of a
transaction is above or below the ``fair market value''\4\ of the
option by at
[[Page 6797]]
least: $0.125 for options trading under $2; $0.20 for options trading
at or above $2 and up to $5; $0.25 for options trading above $5 and up
to $10; $0.40 for options trading above $10 and up to $20; and $0.50
for options trading above $20. For series trading with bid-ask
differentials that are a multiple of the widths established in Rule
8.7(b)(iv), the prescribed error amount would have the same multiple
applied to the amounts prescribed above.
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\4\ Fair market value is defined in Rule 24.16 as the midpoint
of the national best bid and national best offer for the series
(across all exchanges trading the option). In multiply listed
issues, if there are no quotes for comparison purposes, fair market
value shall be determined by Trading Officials. For singly-listed
issues and for transactions occurring as part of the Rapid Opening
System (``ROS trades'') or Hybrid Opening System (``HOSS''), the
Exchange clarified in the proposed rule change that the fair market
value shall be the midpoint of the first quote after the
transaction(s) in question that does not reflect the erroneous
transaction(s).
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Second, the proposal revises the obvious price error provision as
it relates to the handling of transactions involving only CBOE Market-
Makers. Under the current rule, such erroneous price transactions are
nullified. Under the proposal, CBOE-Market-Maker-to-CBOE-Market-Maker
transactions would be subject to adjustment. In applying the proposed
CBOE Market-Maker adjustment provision to index options and options on
ETFs or HOLDRs, the adjustment price would be equal to the fair market
value of the option minus the minimum error amount in the case of an
erroneous sell transaction or the fair market value plus the minimum
error amount in the case of an erroneous buy transaction. If the
adjusted price is not in a multiple of the applicable minimum trading
increment, the adjusted price would be rounded down (up) to the next
price that is a multiple of the applicable minimum trading increment
with respect to an erroneous sell (buy) transaction.
Third, the proposal would eliminate obvious quantity errors as a
type of transaction that is subject to obvious error review. The
elimination of this provision is consistent with the Exchange's current
rule for equity options, which does not have an obvious error review
for quantity errors.\5\
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\5\ See CBOE Rule 6.25(a).
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Lastly, the proposal would make various non-substantive changes to
CBOE Rule 24.16, such as making cross-reference updates to correspond
to the above-described revisions, changing the title of the rule to
reflect its application to options on ETFs and HOLDRS (currently the
title only references index options), clarifying that fair market value
is to be determined by Exchange Trading Officials in accordance with
the provisions of the definition of fair market value, and making other
technical changes.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange \6\ and, in
particular, the requirements of Section 6(b) of the Act \7\ and the
rules and regulations thereunder. Specifically, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\8\ in
that the proposal promotes just and equitable principles of trade,
prevents fraudulent and manipulative acts, removes impediments to and
perfects the mechanism of a free and open market and a national market
system, and, in general, protects investors and the public interest.
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\6\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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The Commission considers that in most circumstances trades that are
executed between parties should be honored. On rare occasions, the
price of the executed trade indicates an ``obvious error'' may exist,
suggesting that it is unrealistic to expect that the parties to the
trade had come to a meeting of the minds regarding the terms of the
transaction. In the Commission's view, the determination of whether an
``obvious error'' has occurred should be based on specific and
objective criteria and subject to specific and objective procedures.
The revised scale for identifying the minimum error amount for an
obvious price error and the elimination of obvious quantity errors set
out a clear and objective methodology for determining when an obvious
error has occurred. The proposed amendments with respect to obvious
error transactions involving only CBOE Market Makers also establish
specific and objective criteria governing the adjustment of such
trades. In addition, the technical conforming and clarifying changes
made by the proposed rule change, including the clarification with
respect to the role of Trading Officials, should help facilitate
understanding and application of CBOE Rule 24.16. Therefore, the
Commission believes that the proposed rule change is consistent with
the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change (SR-CBOE-2006-62), as modified by
Amendment No. 1, be, and it hereby is, approved.
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\9\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-2405 Filed 2-12-07; 8:45 am]
BILLING CODE 8010-01-P