[Federal Register: November 16, 2006 (Volume 71, Number 221)]
[Notices]
[Page 66810-66813]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16no06-114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54726; File No. SR-CBOE-2006-89]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Regarding the Exchange's Open Outcry Crossing Rule
November 8, 2006.
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 November 6, 2006, 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 and II below, which Items have been prepared by the Exchange.
The CBOE has filed this 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\ 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)(iii).
\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
The Exchange proposes certain changes that are intended to clarify
the operation of CBOE Rule 6.74, which pertains to crossing orders in
open outcry. The text of the proposed rule change is available on the
Exchange's Web site (http://www.cboe.com), 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 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
[[Page 66811]]
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 6.74, ``Crossing Orders,'' is an open outcry crossing
rule that was adopted prior to the time that the Exchange established
its Hybrid Trading System (``Hybrid''), which, among other things,
introduced dynamic electronic quotes and the ability for non-public
customer orders to be placed in the electronic book. This proposed rule
change therefore seeks to update CBOE Rule 6.74 in certain respects in
order to clarify the priority of in-crowd market participants
(``ICMPs'') vis-[agrave]-vis electronic trading interests. The proposed
rule change also seeks to clarify the applicability of Section 11(a)(1)
of the Act \5\ to crossing transactions conducted pursuant to CBOE Rule
6.74 and to update certain other provisions that have become outdated.
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\5\ 15 U.S.C. 78k(a)(1).
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First, the Exchange seeks to update the provisions of CBOE Rule
6.74(d), which describes the procedures for crossing orders when a
Floor Broker is seeking a participation entitlement, in order to
clarify the priority of members in the trading crowd after the
applicable participation entitlements have been satisfied. By way of
background, in the event a Floor Broker represents an order that is of
the eligible order size or greater (``original order'') and is also
holding a facilitation order or a solicited order, the Floor Broker may
proceed under the provisions of CBOE Rule 6.74(d) to obtain a crossing
participation entitlement.\6\ The CBOE Rule 6.74(d) crossing
participation entitlement permits the Floor Broker to transact either
20% or 40%, as determined by the appropriate Procedure Committee, of
the remainder of the original order against the facilitation or
solicited order. Further, if a DPM or LMM is granted participation
rights under CBOE Rule 8.87 or CBOE Rule 8.15B, respectively, CBOE Rule
6.74(d)(v) provides that the DPM or LMM participation entitlement is
applied if the trade occurs at the DPM's/LMM's market, provided that
the DPM/LMM participation entitlement will be limited to the number of
contracts that, when combined with the percentage the Floor Broker
crossed, does not exceed 40% of the original order size. After the
applicable public customer orders and participation entitlements have
been satisfied, CBOE Rule 6.74(d)(vi) provides that ``the members of
the trading crowd'' are entitled to participate in the balance
remaining in the order.\7\
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\6\ Pursuant to CBOE Rule 6.74(d)(ii), the Floor Broker crossing
entitlement takes effect after all public customer orders that were
on the limit order book and then represented in the trading crowd at
the time the market was established have been satisfied.
\7\ CBOE Rule 6.74(d)(vi) currently provides in relevant part
that the ``members of the trading crowd who established the market
will have priority over all other orders that were not represented
in the trading crowd at the time the market was established (but not
over customer orders on the book) and will maintain priority over
such orders except for orders that improve upon the market.''
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The proposed rule change will clarify which members of the trading
crowd are entitled to participate in the balance remaining in the
order. Specifically, the proposed rule change provides that the
remaining balance of an order will be allocated among the ICMPs who
established the market. Therefore, neither electronic quotes received
by the Exchange from electronic DPMs and Remote Market-Makers
(categories of CBOE market-makers that are not physically located in
the trading crowd) nor broker-dealer electronic orders resting on the
book would be entitled to participate in the remaining balance of the
order if there is sufficient interest among the ICMPs in the trading
crowd at the same price or better.
Thus, the CBOE Rule 6.74(d) priority sequence is generally such
that, at the same price, public customer orders resting in the book
would have first priority, then the Floor Broker to the extent of the
crossing entitlement, then the DPM/LMM (to the extent of the DPM/LMM
participation entitlement), and then the ICMPs. Further, nothing
prohibits a Floor Broker or DPM/LMM from trading more than his
percentage entitlement if the other ICMPs do not choose to trade the
remaining portion of the order. To the extent there may be any further
remaining balance, same-priced broker-dealer orders resting in the book
and electronic quotes of market makers would have priority to trade
next.
The proposed rule change also clarifies how the remaining balance
of the order is allocated among the ICMPs, on which the rule is
currently silent. Specifically, the proposed rule change provides that
priority to trade the remaining portion of an order being crossed in
open outcry shall be afforded to bids (offers) made by ICMPs in the
sequence in which they are made. If bids (offers) were made at the same
time, or in the event that the sequence cannot be reasonably
determined, priority shall be apportioned equally among the ICMPs who
established the market. In the event an ICMP declines to accept any
portion of the available contracts, any remaining contracts shall be
apportioned equally among the other ICMPs who established the market
until all contracts have been apportioned.
The proposed rule change also seeks to adopt an introductory
paragraph for CBOE Rule 6.74 that generally clarifies the priority
principles applicable among ICMPs and electronic trading interest.
Specifically, the introduction will provide that, at the same price,
bids and offers of ICMPs have first priority, except as is otherwise
provided in the Rule with respect to public customer orders resting in
the electronic book, and all other bids and offers (including bids and
offers of broker-dealers in the electronic book and electronic quotes
of Market-Makers) have second priority.
All transactions conducted under CBOE Rule 6.74 must be in
compliance with Section 11(a) of the Act and the rules promulgated
thereunder. Therefore, the introduction will also make clear that, in
order to transact proprietary orders \8\ on the floor of the Exchange
pursuant to the Rule, members must ensure that they qualify for an
exemption from Section 11(a)(1) of the Act.
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\8\ For purposes of the Rule, a ``proprietary order'' will mean
an order for a member's own account, the account of an associated
person, or an account with respect to which the member or an
associated person thereof exercises investment discretion.
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Members relying on Section 11(a)(1)(G) of the Act \9\ and Rule
11a1-1(T) thereunder (the ``G'' exemption) \10\ as an exemption must
comply with the requirements of that exemption before executing a
proprietary order, including the requirement to yield priority to any
bid or offer at the same price for the account of a person who is not,
or is not associated with, a member (a ``non-member''), irrespective of
the size of any such bid or offer or the time when it was entered.
Because CBOE's electronic book does not distinguish between member and
non-member broker-dealer orders, the introductory language also
clarifies how a member relying on the ``G'' exemption must yield
priority. Specifically, before a member that is relying on the ``G''
exemption can execute a proprietary order, the member must first yield
priority to all same-priced public customer orders and broker-dealer
orders (whether non-member or member) resting in the electronic book,
as well as any other bids and offers that would otherwise
[[Page 66812]]
have priority over those broker-dealer orders under CBOE Rule 6.74.
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\9\ 15 U.S.C. 78k(a)(1)(G).
\10\ 17 CFR 240.11a1-1(T).
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For example, assume a Floor Broker is relying on the ``G''
exemption and asserting a participation entitlement when attempting to
cross an order with a firm proprietary order pursuant to CBOE Rule
6.74(d). The Floor Broker must yield priority to any same-priced public
customer orders and broker-dealer orders resting in the electronic
book, as well as any DPM/LMM and other ICMPs that would otherwise have
priority over those broker-dealer orders. In such a scenario, the CBOE
Rule 6.74(d) priority sequence described above is modified so that, at
the same price, public customer orders resting in the book would have
first priority, then the DPM/LMM (to the extent of the DPM/LMM
participation entitlement), then the ICMPs (to the extent each such
participant also qualifies for an exemption from Section 11(a)(1) of
the Act but is not relying on a ``G'' exemption), then broker dealer
orders resting in the book, and then the Floor Broker's proprietary
order (along with any other ICMPs also relying on the ``G'' exemption).
As in CBOE Rule 6.74(d)(v), the Floor Broker's percentage entitlement
to the remaining contracts, when combined with the DPM/LMM guaranteed
participation, may not exceed 40% of the order. However, provided the
``G'' exemption requirements are satisfied, nothing prohibits a Floor
Broker or DPM/LMM from trading more than their applicable percentage
entitlement if other ICMPs do not choose to trade the remaining portion
of the order. To the extent there may be any further remaining balance,
same-priced electronic quotes of market makers would have priority to
trade next.
Finally, the Exchange proposes various other changes to CBOE Rule
6.74, including conforming changes to reference ``ICMPs'' throughout
the text of the Rule. The Exchange also proposes changes to the text of
Interpretation and Policy .08 of the Rule to clarify that CBOE Rule
6.74(d) supercedes the priority provisions of paragraph (d) of CBOE
Rule 6.9, ``Solicited Transactions,'' with respect to both
facilitations and solicitations.\11\ The Exchange also proposes to
remove an outdated reference to a ``Board Broker,'' a term which no
longer is utilized by the Exchange.
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\11\ The text of CBOE Rule 6.74, Interpretation and Policy .08
currently refers to ``solicited orders,'' which are defined in CBOE
Rule 6.9, Interpretation and Policy .01 to include both facilitation
orders and orders resulting from solicitations.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\12\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\13\ in particular, in that it
is designed to promote just and equitable principles of trade, serve to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and protect investors and the
public interest.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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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 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
The Exchange has designated the proposed rule change as one that:
(i) Does not significantly affect the protection of investors or the
public interest; (ii) does not impose any significant burden on
competition; and (iii) does not become operative for 30 days from the
date of filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest. In
addition, as required under Rule 19b-4(f)(6)(iii),\14\ the CBOE
provided the Commission with written notice of its intention to file
the proposed rule change, along with a brief description and the text
of the proposed rule change, at least five business days prior to
filing the proposal with the Commission. Therefore, the foregoing rule
change has become effective pursuant to Section 19(b)(3)(A) of the Act
\15\ and Rule 19b-4(f)(6) thereunder.\16\
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\14\ 17 CFR 240.19b-4(f)(6)(iii).
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
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Pursuant to Rule 19b-4(f)(6)(iii) under the Act, a proposal does
not become operative for 30 days after the date of its filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest. The CBOE has requested
that the Commission waive the 30-day operative delay. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because the proposal
will clarify the operation of CBOE Rule 6.74 and will clarify how Floor
Brokers may comply with the requirements of Section 11(a) under the
Act.\17\ For these reasons, the Commission designates that the proposed
rule change become operative immediately.
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\17\ For purposes 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).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate the 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. 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-2006-89 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 No. SR-CBOE-2006-89. 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
[[Page 66813]]
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. 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 No. SR-
CBOE-2006-89 and should be submitted on or before December 7, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-19381 Filed 11-15-06; 8:45 am]
BILLING CODE 8011-01-P