[Federal Register: November 29, 2006 (Volume 71, Number 229)]
[Notices]
[Page 69151-69153]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no06-86]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54805; File No. SR-CBOE-2006-92]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to the
Penny Pilot Program
November 21, 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 8, 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, II, and III below, which Items have been substantially
prepared by the CBOE. 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules to implement a Pilot
Program to quote and trade certain option classes in pennies. The text
of the proposed rule change is available on the Exchange's Web site at
http://www.cboe.com, at the Office of the Secretary, CBOE, 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 CBOE 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 proposes to amend its rules in connection with the Penny Pilot
Program, which is scheduled to commence on January 26, 2007.
Specifically, the following 12 classes \3\ will participate in the
Penny Pilot Program, which is scheduled initially to last for six
months.
---------------------------------------------------------------------------
\3\ CBOE understands that another option class will be added to
the Penny Pilot Program to bring the total number of classes in the
Penny Pilot Program to 13.
IWM--Ishares Russell 2000
QQQQ--QQQQ
SMH--SemiConductor Holders
GE--General Electric
AMD--Advanced Micro Devices
MSFT--Microsoft
INTC--Intel
CAT--Caterpiller
WFMI--Whole Foods
TXN--Texas Instruments
FLEX--Flextronics International
SUNW--Sun Micro
The minimum increments for all classes in the Penny Pilot Program,
except for the QQQQs, will be $0.01 for all option series below $3
(including LEAPS), and $0.05 for all option series $3 and above
(including LEAPS). With respect to the QQQQs, the minimum increment
will be $0.01 for all option series. For all other option classes not
participating in the Penny Pilot Program, the current quoting and
trading minimum increments will remain the same.
In connection with the Penny Pilot Program, CBOE proposes to amend
CBOE Rule 6.42 relating to the minimum increments for option classes.
In particular, CBOE proposes to include a subparagraph stating that the
decimal increments for bids and offers for all series of option classes
participating in the Penny Pilot Program will be announced to the
membership via Regulatory Circular and published by the Exchange on its
Web site. Because the Penny Pilot Program is expected to commence on
January 26, 2007, on a rolling basis with one or more Pilot classes
beginning on that date and the other Pilot classes quoting and trading
in penny increments shortly thereafter, CBOE believes it is more
appropriate to notify its members as to the minimum increments for
Pilot Classes and their start date in the Pilot Program via Regulatory
Circular as opposed to codifying this information in CBOE Rule 6.42.
CBOE has filed for Commission approval a copy of the proposed
Regulatory Circular that it intends to issue.
CBOE also proposes to amend CBOE Rule 6.54 relating to
accommodation liquidations (``cabinet trades'') to state that the rule
is not applicable to trading in option classes participating in the
Penny Pilot Program. Currently, CBOE Rule 6.54 sets forth the terms and
conditions in which cabinet trades can be executed on CBOE. Because
cabinet trades involve orders priced at $1 per option contract, the
specific terms and conditions for cabinet trading are not applicable to
option classes participating in the Penny Pilot Program.
Due to the anticipated demands on CBOE's system capacity and the
option industry's capacity for processing quotations and transactions
in penny increments, CBOE has implemented or intends to implement
several quote mitigation strategies.
Limitation on Messages. Pursuant to CBOE Rule 6.23A, CBOE
currently limits the number of messages sent by members accessing CBOE
electronically in order to protect the integrity of the Hybrid Trading
System. Limiting the number of messages sent by members accessing CBOE
electronically reduces the number of quotations sent by CBOE
[[Page 69152]]
to the Options Price Reporting Authority (``OPRA'').
Imposition of Fees. CBOE is developing an objective and
fair method to encourage electronic quoters at CBOE to reduce the
number of quotations that are sent to CBOE by imposing fees that will
go into effect on February 1, 2007.\4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 54804 (November 21,
2006) (File No. SR-CBOE-2006-98).
---------------------------------------------------------------------------
Amendment to Market-Maker Obligations. CBOE proposes to
amend CBOE Rule 8.7 to modify the continuous electronic quoting
obligation of Market-Makers and Remote Market-Makers (``RMMs'').
Currently, as set forth in CBOE Rule 8.7(d)(ii) and (e), Market-Makers
and RMMs, respectively, are obligated to provide continuous electronic
quotes in 60% of the series of his/her appointed option class. CBOE
proposes to amend these obligations to provide that Market-Makers and
RMMs shall provide continuous electronic quotes in 60% of the series of
his/her appointed class that have a time to expiration of less than
nine months. CBOE believes that excluding series that are nine months
or more to expiration, i.e., LEAPS, from Market-Makers' and RMMs'
continuous quoting obligations should reduce the number of quotes CBOE
disseminates to OPRA, while continuing to impose upon Market-Makers and
RMMs significant quoting obligations. CBOE also notes that this
proposed change is consistent with CBOE Rule 5.8 which provides that
the continuity rules do not apply to option series until the time to
expiration is less than nine months.\5\
---------------------------------------------------------------------------
\5\ The Commission recently approved a similar proposal from the
Philadelphia Stock Exchange. See Securities Exchange Act Release No.
54648 (October 24, 2006), 71 FR 63375 (October 30, 2006) (SR-Phlx-
2006-52).
---------------------------------------------------------------------------
Delisting Policy. CBOE is adopting the following delisting
policy: equity option classes with national average daily volume
(``ADV'') of less than 20 contracts will be delisted.
Oversight of Member Quoting. CBOE continuously monitors
the quotation activity of its members submitting electronic quotations
to CBOE, and regularly notifies any member that appears to be
disseminating significantly more quotations than other members. CBOE
also regularly communicates with independent vendors who provide
quotation services to members to encourage the vendors to modify their
systems to provide efficient quotation systems and to alert them
whenever it appears that users of their system appear to be submitting
significantly more quotations than other members.
Finally, CBOE, along with the other options exchanges, intends to
submit to the Commission following the fourth month of the Penny Pilot
Program (i.e., by the end of May 2007) a report analyzing the first
three months of the Penny Pilot Program. In particular, CBOE
anticipates that its report will assess the impact of the changes to
the minimum increments during the first three months of the Program,
including its effects on (i) Market participants and customers; (ii)
market performance and quality, such as quoted spreads, effective
spreads, and the displayed size in the Pilot classes; and (iii) OPRA,
vendor and exchange capacity.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\6\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\7\ in particular, in that the
proposed rule change is designed to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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
Written comments on the proposed rule change were neither solicited
nor received.
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 No. SR-CBOE-2006-92 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-2006-92. 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 at 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. Copies of such
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-2006-92 and should be submitted on or before December
20, 2006.
[[Page 69153]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E6-20219 Filed 11-28-06; 8:45 am]
BILLING CODE 8011-01-P