Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Chicago Board Options Exchange, Incorporated Relating to the SizeQuote Mechanism, 2197-2200 [E5-67]

Download as PDF Federal Register / Vol. 70, No. 8 / Wednesday, January 12, 2005 / Notices shorter time as the Commission may designate if consistent with the protection of investors and the public interest pursuant to section 19(b)(3)(A) of the Act 11 and Rule 19b–4(f)(6)12 thereunder. In addition, the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of the filing of the proposed rule change as required by Rule 19b–4(f)(6).13 The Exchange has requested that the Commission waive the 30-day operative delay.14 The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Acceleration of the operative delay will allow customers to continue to benefit from the large trade discount in the form of a cap on the quantity of customer contracts that are assessed transaction fees for most CBOE index options, which otherwise would expire on December 31, 2004. For this reason, the Commission designates the proposed rule change, as amended, to be effective upon filing with the Commission.15 At any time within 60 days of the filing of the 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 the furtherance of the purposes of the Act.16 Number SR–CBOE–2004–88 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments [Release No. 34–50967; File No. SR–CBOE– 2004–72] 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: • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. All submissions should refer to File Number SR–CBOE–2004–88. 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 (https://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 Section, 450 Fifth Street, NW., Washington, DC 20549. 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– 2004–88 and should be submitted on or before February 2, 2005. Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File For the Commission, by the Division of Market Regulation, pursuant to delegated authority.17 J. Lynn Taylor, Assistant Secretary. [FR Doc. 05–592 Filed 1–11–05; 8:45 am] 11 15 12 17 BILLING CODE 8010–01–P U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 13 Id. 14 17 CFR 240.19b–4(f)(6)(iii). purposes of only accelerating the operative date of this proposal, the Commission has considered the rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 16 For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change under section 19(b)(3)(C) of the Act, the Commission considers that period to commence on January 3, 2005, the date the Exchange filed Amendment No. 1 to the proposed rule change. See 15 U.S.C. 78s(b)(3)(C). 15 For VerDate jul<14>2003 17:37 Jan 11, 2005 Jkt 205001 2197 PO 00000 Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Chicago Board Options Exchange, Incorporated Relating to the SizeQuote Mechanism January 5, 2005. 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 10, 2004, 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 by the CBOE. On December 22, 2004, 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 amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The CBOE proposes to adopt a SizeQuote Mechanism for the execution of large-sized orders in open outcry. The text of the proposed rule change is below. Proposed new language is in italics. * * * * * Rule 6.74 ‘‘Crossing Orders’’ (a)–(e) No change. (f) Open Outcry ‘‘SizeQuote’’ Mechanism (i) SizeQuotes Generally: The SizeQuote Mechanism is a process by which a floor broker (‘‘FB’’) may execute and facilitate large-sized orders in open outcry. Floor brokers must be willing to facilitate the entire size of the order for which they request SizeQuotes (the ‘‘SizeQuote Order’’). The appropriate Market Performance Committee shall determine the classes in which the SizeQuote Mechanism shall apply. The SizeQuote Mechanism will operate as a pilot program which expires [insert date one year from date of approval]. (A) Eligible Order Size: The appropriate MPC shall establish the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Amendment No. 1 replaces the original filing in its entirety. See e-mail message from Stephen Youhn, Assistant Secretary, CBOE, to Yvonne Fraticelli, Special Counsel, Division of Market Regulation, Commission, on January 5, 2005. 2 17 17 17 CFR 200.30–3(a)(12). Frm 00089 Fmt 4703 Sfmt 4703 E:\FR\FM\12JAN1.SGM 12JAN1 2198 Federal Register / Vol. 70, No. 8 / Wednesday, January 12, 2005 / Notices eligible order size however such size shall not be less than 250 contracts. (B) In-crowd Market Participants: The term ‘‘in-crowd market participants’’ (‘‘ICMPs’’) shall be as defined in CBOE Rule 6.45A. (C) Public Customer Priority: Public customer orders in the electronic book have priority to trade with a SizeQuote order over any ICMP providing a SizeQuote response at the same price as the order in the electronic book. (D) DPM Participation Rights: The DPM participation entitlement shall not apply to SizeQuote transactions. (E) FBs may not execute a SizeQuote order at a price inferior to the national best bid or offer (‘‘NBBO.’’) Unless a SizeQuote request is properly canceled in accordance with paragraph (iv), a FB is obligated to execute the entire SizeQuote order at a price that is not inferior to the NBBO in situations where there are no SizeQuote responses received or where such responses are inferior to the NBBO. (ii) SizeQuote Procedure: Upon request by a FB for a SizeQuote, ICMPs may respond with indications of the price and size at which they would be willing to trade with a SizeQuote order. After the conclusion of time during which interested ICMPs have been given the opportunity to provide their indications, the FB must execute the SizeQuote order with ICMPs and/or with a firm facilitation order in accordance with the following procedures: (A) Executing the Order at ICMP’s Best Price: ICMPs that provided SizeQuote responses at the highest bid or lowest offer (‘‘best price’’) have priority to trade with the SizeQuote Order at that best price. Allocation of the order among ICMPs shall be prorata, up to the size of each ICMP’s SizeQuote response. The FB must trade at the best price any contracts remaining in the original SizeQuote Order that were not executed by ICMPs providing SizeQuote responses. (B) Executing the Order at a Price that Improves upon ICMP’s Price by One Minimum Increment: ICMPs that provided SizeQuote responses at the best price (‘‘eligible ICMPs’’) have priority to trade with the SizeQuote Order at a price equal to one trading increment better than the best price (‘‘improved best price’’). Allocation of the order among eligible ICMPs at the improved best price shall be prorata, up to the size of each eligible ICMP’s SizeQuote response. The FB must trade at the improved best price any contracts remaining in the original SizeQuote Order that were not executed by eligible ICMPs. VerDate jul<14>2003 17:37 Jan 11, 2005 Jkt 205001 (C) Trading at a Price that Improves upon ICMP’s Price by More than One Minimum Increment: A FB may execute the entire SizeQuote order at a price two trading increments better than the best price communicated by the ICMPs in their responses to the SizeQuote request. (iii) Definition of Trading Increments: Permissible trading increments are $0.05 for options quoted below $3.00 and $0.10 for all others. In classes in which bid-ask relief is granted pursuant to CBOE Rule 8.7(b)(iv), the permissible trading increments shall also increase by the corresponding amount. For example, if a series trading above $3.00 has double-width bid-ask relief, the permissible trading increment for purposes of this rule shall be $0.20. (iv) It will be a violation of a FB’s duty of best execution to its customer if it were to cancel a SizeQuote order to avoid execution of the order at a better price. The availability of the SizeQuote Mechanism does not alter a FB’s best execution duty to get the best price for its customer. A SizeQuote request can be canceled prior to the receipt by the FB of responses to the SizeQuote request. Once the FB receives a response to the SizeQuote request, if he/she were to cancel the order and then subsequently attempt to execute the order at an inferior price to the previous SizeQuote response, there would be a presumption that the FB did so to avoid execution of its customer order in whole or in part by others at the better price. Interpretations and Policies No change. * * * * * 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 parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change CBOE rules impose several obligations upon floor brokers (‘‘FBs’’), including the requirement in paragraph (a) of CBOE Rule 6.73, ‘‘Responsibilities of Floor Brokers,’’ that a FB handling an PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 order use due diligence in executing that order at the best price(s) available. CBOE Rule 6.73.01 supplements this general requirement by requiring FBs to ascertain whether a better price than those currently displayed in the limit order book is available in the trading crowd. In order to assist FBs in their exercise of due diligence, the Exchange believes it would be beneficial to adopt new procedures governing the execution of certain large-sized orders, which by virtue of their large size often require specialized handling. The purpose of this rule filing, therefore, is to adopt on a one-year pilot basis a trading procedure mechanism called the SizeQuote Mechanism for use by FBs in their representation of large-sized orders in open outcry.4 The SizeQuote Mechanism is a process by which a FB, in his/her exercise of due diligence to execute orders at the best price(s), may execute and facilitate large-sized orders in open outcry. For purposes of this rule, the minimum qualifying order size is 250 contracts 5 and FBs must stand ready to facilitate the entire size of the order for which they request SizeQuotes (the ‘‘SizeQuote Order’’). The SizeQuote procedure works as follows: A FB holding an order for at least 250 contracts must specifically request a SizeQuote from in-crowd market participants (‘‘ICMPs’’).6 Upon such a request by a FB, ICMPs may respond with indications of the price and size at which they would be willing to trade with a SizeQuote Order. ICMPs may respond with any size and price they desire (subject to the rules governing the current market maker obligation requirements) and as such are not obligated to respond with a size of at least 250 contracts.7 The proposal provides that FBs may not execute a SizeQuote Order at a price inferior to the NBBO. Proposed paragraph (f)(i)(E) 4 The Exchange in the original rule filing proposed including the rule text describing the SizeQuote Mechanism in CBOE Rule 6.73, ‘‘Responsibilities of Floor Brokers.’’ Amendment No. 1 relocates the same text to CBOE Rule 6.74, ‘‘Crossing Orders,’’ with the technical changes as described herein. 5 The appropriate Exchange committee will determine the classes in which SizeQuote operates and may vary the minimum qualifying order size, provided such number may not be less than 250 contracts. 6 Pursuant to CBOE Rule 6.45A, ‘‘Priority and Allocation of Trades for CBOE Hybrid System,’’ incrowd market participants include in-crowd Market-Makers, an in-crowd DPM, and a floor broker representing orders in the trading crowd. 7 CBOE Rule 8.7(d), ‘‘Market Making Obligations Applicable to Hybrid Classes,’’ requires MarketMakers to respond to any request by a FB for a market with a legal-width (as defined in CBOE Rule 8.7(b)(iv)), 10-contract minimum size quote in classes trading on the CBOE Hybrid System. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 70, No. 8 / Wednesday, January 12, 2005 / Notices clarifies that unless a SizeQuote request is properly canceled in accordance with paragraph (iv), a FB is obligated to execute the entire SizeQuote Order at a price that is not inferior to the NBBO in situations where there are no SizeQuote responses received or where such responses are inferior to the NBBO. After the conclusion of time during which interested ICMPs have been given the opportunity to provide their indications, the FB will execute the SizeQuote Order he is holding with ICMPs or with a facilitation order, or both, in accordance with the following procedures: 8 Executing the SizeQuote order at ICMP’s best price: ICMPs that provided SizeQuote responses at the highest bid or lowest offer (‘‘best price’’) have priority to trade with the SizeQuote Order at that best price. For example, assume a FB requests a SizeQuote and ICMPs respond with a market quote of $1.00—1.20 for 1,000 contracts. This quote constitutes the ‘‘best price’’ and those ICMPs that responded have priority at those prices.9 If the FB chooses to trade at either of those prices, the SizeQuote Order will be allocated pro-rata to those ICMPs that responded with a quote at the best price, up to the size of their respective quotes.10 If in the above example the SizeQuote Order is for more than 1,000 contracts, the FB must trade the balance with a facilitation order at the best price. ICMPs that did not respond to the SizeQuote request would not be eligible to participate in the allocation of this trade. Executing the order at a price that improves upon ICMP’s price by one minimum increment: 11 ICMPs that provided SizeQuote responses at the best price (‘‘eligible ICMPs’’) have priority to trade with the SizeQuote Order at a price equal to one minimum increment better than the best price (‘‘improved best price’’). Accordingly, using the example above, eligible ICMPs, if they desire, have priority at prices of $1.05 and $1.15 of up to 1,000 8 The FB will execute the SizeQuote Order either with ICMPs or with a firm facilitation order, or both, in accordance with the requirements of paragraph (ii). 9 Public customers in the electronic book have priority to trade with a SizeQuote Order over any ICMP providing a SizeQuote response at the same price as the order in the electronic book. See proposed CBOE Rule 6.74(f)(i)(C). This example assumes there are no public customer orders at the SizeQuote response price. 10 There will be no DPM participation entitlement in SizeQuote trades, even if the DPM is among those ICMPs quoting at the best price. 11 Minimum increments are governed by CBOE Rule 6.42, ‘‘Minimum Increments for Bids and Offers.’’ The term ‘‘minimum increment’’ is synonymous with ‘‘trading increment.’’ VerDate jul<14>2003 17:37 Jan 11, 2005 Jkt 205001 contracts.12 If the FB chooses to trade at either of those prices, the SizeQuote Order will be allocated pro-rata at the improved best price to those eligible ICMPs that responded with a quote at the best price, up to the size of their respective quotes. If the SizeQuote Order is for more than 1,000 contracts, the FB must trade the balance with a facilitation order at the improved best price. ICMPs that did not respond to the SizeQuote request would not be eligible to participate in the allocation of this trade. Trading at a price that improves upon ICMP’s price by more than one minimum increment: A FB may execute the entire SizeQuote Order with a facilitation order at a price two minimum increments better than the best price communicated by the ICMPs in their responses to the SizeQuote request. Using the example above, a FB could trade the SizeQuote Order with a facilitation order at $1.10. ICMPs would not be able to participate in the trade at that price. The Exchange also proposes to adopt new paragraph (iv) to explicitly state that it will be a violation of a FB’s duty of best execution to its customer if it were to cancel a SizeQuote Order to avoid execution of the order at a better price. The availability of the SizeQuote Mechanism does not alter a FB’s best execution duty to get the best price for its customer. A SizeQuote request can be canceled prior to the receipt by the FB of responses to the SizeQuote request. Once the floor broker receives a response to the SizeQuote request, if he/she were to cancel the order and then subsequently attempt to execute the order at an inferior price to the previous SizeQuote response, there would be a presumption that the FB did so to avoid execution of its customer order in whole or in part by others at the better price. The Exchange represents that it will provide to the Commission at the end of the pilot period a report summarizing the effectiveness of the SizeQuote program. Pending a report that indicates that the SizeQuote program has been successful, the Exchange anticipates submitting a rule filing that either requests extension of the SizeQuote program or permanent approval of the pilot. The Exchange believes that the SizeQuote proposal provides a wellbalanced mechanism that enhances the trading crowd’s ability to quote competitively and participate in open 12 Obviously, there is no obligation requiring an ICMP to trade at a price that is better than his/her verbal quote. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 2199 outcry trades while at the same time it creates a process that gives greater certainty to FBs in the execution of large orders. Under the proposal, ICMPs not only will have priority at the price of the quote they give in response to a SizeQuote request, but they also will have priority, if they want it, at a price that is one trading increment better than their quote. FBs will now have more certainty in that ICMPs will have one opportunity to respond with a quote response and if they do not, they will not participate in the trade. Moreover, once an ICMP gives his/her best price (i.e., SizeQuote response), he/she may not subsequently change the terms of that response after the FB announces its intention to trade, although the ICMP will have priority at a price that is one trading increment better than his/her quote. This further enhances ICMPs’ incentives to quote competitively. The Exchange also believes that the proposal enhances an ICMP’s incentive to quote competitively by giving complete priority at not only his/her price but also at one trading increment better than his/her SizeQuote response. For these reasons, 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.13 Specifically, the Exchange believes the proposed rule change is consistent with the section 6(b)(5) 14 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. 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 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 written comments on the proposed rule change. 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 13 15 14 15 E:\FR\FM\12JAN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 12JAN1 2200 Federal Register / Vol. 70, No. 8 / Wednesday, January 12, 2005 / Notices 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 self-regulatory organization 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. submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE– 2004–72 and should be submitted on or before February 2, 2005. 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: BILLING CODE 8010–01–P Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2004–72 on the subject line. Self-Regulatory Organizations; Notice of Filing of a Proposed Rule Change by the Chicago Board Options Exchange, Incorporated Relating to Exchange Rule 17.10(d)—Review of Decision Not To Initiate Charges Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. All submissions should refer to File Number SR–CBOE–2004–72. 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 (https://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 Section, 450 Fifth Street, NW., Washington, DC 20549. 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 VerDate jul<14>2003 17:37 Jan 11, 2005 Jkt 205001 For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 J. Lynn Taylor, Assistant Secretary. [FR Doc. E5–67 Filed 1–11–05; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–50964; File No. SR–CBOE– 2004–82] January 5, 2005. 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 December 8, 2004 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 by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Exchange Rule 17.10(d)—Review of Decision Not to Initiate Charges by transferring the authority to review the Exchange’s Business Conduct Committee’s (‘‘BCC’’) decision to decline to authorize the issuance of a Statement of Charges from the President of the Exchange to the Regulatory Oversight Committee (‘‘ROC’’) and by changing the time to assess such a review from 30 days to 45 days. The text of the proposed rule change is available at the Office of the Secretary, CBOE and at the Commission. PO 00000 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 Frm 00092 Fmt 4703 Sfmt 4703 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 those 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose Exchange Rule 17.10(d) provides a ‘‘check and balance’’ process to ensure that in situations where the BCC declines to authorize the issuance of a Statement of Charges that is recommended by the Exchange staff, the President of the Exchange has an opportunity to review the BCC’s decision and refer the matter to the Board of Directors. The Exchange is seeking two specific modifications to this rule. First, the Exchange seeks to shift the review authority from the President of the Exchange to the Exchange’s ROC. Given the ROC’s oversight of regulation, the Exchange believes that it is appropriate to shift the reviewing authority from the President to the ROC. Additionally, the Exchange believes that this amendment will reduce the appearance of any conflict of interest. As a result, the Exchange believes that this transfer of reviewing authority from the President to the ROC further enhances the independence of CBOE’s regulatory structure. Second, the Exchange seeks to amend and clarify the time frame of review from 30 to 45 days, commencing from the date the Exchange serves the subject of the alleged violation with notice of a decision by the Business Conduct Committee pursuant to Exchange Rule 17.4(a) not to initiate the charges that have been recommended by Exchange staff. The Exchange believes that in transferring this review authority to the ROC, additional time may be needed to accommodate the busy schedules of the members of the ROC and to provide the members of the ROC with greater scheduling flexibility. The Exchange believes that by transferring the reviewing authority from the President to the ROC and by E:\FR\FM\12JAN1.SGM 12JAN1

Agencies

[Federal Register Volume 70, Number 8 (Wednesday, January 12, 2005)]
[Notices]
[Pages 2197-2200]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-67]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50967; File No. SR-CBOE-2004-72]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Chicago Board Options Exchange, 
Incorporated Relating to the SizeQuote Mechanism

January 5, 2005.
    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 10, 2004, 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 by the CBOE. 
On December 22, 2004, 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 amended, 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. See e-mail message from Stephen Youhn, Assistant 
Secretary, CBOE, to Yvonne Fraticelli, Special Counsel, Division of 
Market Regulation, Commission, on January 5, 2005.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to adopt a SizeQuote Mechanism for the execution 
of large-sized orders in open outcry. The text of the proposed rule 
change is below. Proposed new language is in italics.
* * * * *

Rule 6.74 ``Crossing Orders''

    (a)-(e) No change.
    (f) Open Outcry ``SizeQuote'' Mechanism
    (i) SizeQuotes Generally: The SizeQuote Mechanism is a process by 
which a floor broker (``FB'') may execute and facilitate large-sized 
orders in open outcry. Floor brokers must be willing to facilitate the 
entire size of the order for which they request SizeQuotes (the 
``SizeQuote Order''). The appropriate Market Performance Committee 
shall determine the classes in which the SizeQuote Mechanism shall 
apply. The SizeQuote Mechanism will operate as a pilot program which 
expires [insert date one year from date of approval].
    (A) Eligible Order Size: The appropriate MPC shall establish the

[[Page 2198]]

eligible order size however such size shall not be less than 250 
contracts.
    (B) In-crowd Market Participants: The term ``in-crowd market 
participants'' (``ICMPs'') shall be as defined in CBOE Rule 6.45A.
    (C) Public Customer Priority: Public customer orders in the 
electronic book have priority to trade with a SizeQuote order over any 
ICMP providing a SizeQuote response at the same price as the order in 
the electronic book.
    (D) DPM Participation Rights: The DPM participation entitlement 
shall not apply to SizeQuote transactions.
    (E) FBs may not execute a SizeQuote order at a price inferior to 
the national best bid or offer (``NBBO.'') Unless a SizeQuote request 
is properly canceled in accordance with paragraph (iv), a FB is 
obligated to execute the entire SizeQuote order at a price that is not 
inferior to the NBBO in situations where there are no SizeQuote 
responses received or where such responses are inferior to the NBBO.
    (ii) SizeQuote Procedure: Upon request by a FB for a SizeQuote, 
ICMPs may respond with indications of the price and size at which they 
would be willing to trade with a SizeQuote order. After the conclusion 
of time during which interested ICMPs have been given the opportunity 
to provide their indications, the FB must execute the SizeQuote order 
with ICMPs and/or with a firm facilitation order in accordance with the 
following procedures:
    (A) Executing the Order at ICMP's Best Price: ICMPs that provided 
SizeQuote responses at the highest bid or lowest offer (``best price'') 
have priority to trade with the SizeQuote Order at that best price. 
Allocation of the order among ICMPs shall be prorata, up to the size of 
each ICMP's SizeQuote response. The FB must trade at the best price any 
contracts remaining in the original SizeQuote Order that were not 
executed by ICMPs providing SizeQuote responses.
    (B) Executing the Order at a Price that Improves upon ICMP's Price 
by One Minimum Increment: ICMPs that provided SizeQuote responses at 
the best price (``eligible ICMPs'') have priority to trade with the 
SizeQuote Order at a price equal to one trading increment better than 
the best price (``improved best price''). Allocation of the order among 
eligible ICMPs at the improved best price shall be prorata, up to the 
size of each eligible ICMP's SizeQuote response. The FB must trade at 
the improved best price any contracts remaining in the original 
SizeQuote Order that were not executed by eligible ICMPs.
    (C) Trading at a Price that Improves upon ICMP's Price by More than 
One Minimum Increment: A FB may execute the entire SizeQuote order at a 
price two trading increments better than the best price communicated by 
the ICMPs in their responses to the SizeQuote request.
    (iii) Definition of Trading Increments: Permissible trading 
increments are $0.05 for options quoted below $3.00 and $0.10 for all 
others. In classes in which bid-ask relief is granted pursuant to CBOE 
Rule 8.7(b)(iv), the permissible trading increments shall also increase 
by the corresponding amount. For example, if a series trading above 
$3.00 has double-width bid-ask relief, the permissible trading 
increment for purposes of this rule shall be $0.20.
    (iv) It will be a violation of a FB's duty of best execution to its 
customer if it were to cancel a SizeQuote order to avoid execution of 
the order at a better price. The availability of the SizeQuote 
Mechanism does not alter a FB's best execution duty to get the best 
price for its customer. A SizeQuote request can be canceled prior to 
the receipt by the FB of responses to the SizeQuote request. Once the 
FB receives a response to the SizeQuote request, if he/she were to 
cancel the order and then subsequently attempt to execute the order at 
an inferior price to the previous SizeQuote response, there would be a 
presumption that the FB did so to avoid execution of its customer order 
in whole or in part by others at the better price.

Interpretations and Policies

    No change.
* * * * *

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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    CBOE rules impose several obligations upon floor brokers (``FBs''), 
including the requirement in paragraph (a) of CBOE Rule 6.73, 
``Responsibilities of Floor Brokers,'' that a FB handling an order use 
due diligence in executing that order at the best price(s) available. 
CBOE Rule 6.73.01 supplements this general requirement by requiring FBs 
to ascertain whether a better price than those currently displayed in 
the limit order book is available in the trading crowd. In order to 
assist FBs in their exercise of due diligence, the Exchange believes it 
would be beneficial to adopt new procedures governing the execution of 
certain large-sized orders, which by virtue of their large size often 
require specialized handling. The purpose of this rule filing, 
therefore, is to adopt on a one-year pilot basis a trading procedure 
mechanism called the SizeQuote Mechanism for use by FBs in their 
representation of large-sized orders in open outcry.\4\
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    \4\ The Exchange in the original rule filing proposed including 
the rule text describing the SizeQuote Mechanism in CBOE Rule 6.73, 
``Responsibilities of Floor Brokers.'' Amendment No. 1 relocates the 
same text to CBOE Rule 6.74, ``Crossing Orders,'' with the technical 
changes as described herein.
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    The SizeQuote Mechanism is a process by which a FB, in his/her 
exercise of due diligence to execute orders at the best price(s), may 
execute and facilitate large-sized orders in open outcry. For purposes 
of this rule, the minimum qualifying order size is 250 contracts \5\ 
and FBs must stand ready to facilitate the entire size of the order for 
which they request SizeQuotes (the ``SizeQuote Order''). The SizeQuote 
procedure works as follows:
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    \5\ The appropriate Exchange committee will determine the 
classes in which SizeQuote operates and may vary the minimum 
qualifying order size, provided such number may not be less than 250 
contracts.
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    A FB holding an order for at least 250 contracts must specifically 
request a SizeQuote from in-crowd market participants (``ICMPs'').\6\ 
Upon such a request by a FB, ICMPs may respond with indications of the 
price and size at which they would be willing to trade with a SizeQuote 
Order. ICMPs may respond with any size and price they desire (subject 
to the rules governing the current market maker obligation 
requirements) and as such are not obligated to respond with a size of 
at least 250 contracts.\7\ The proposal provides that FBs may not 
execute a SizeQuote Order at a price inferior to the NBBO. Proposed 
paragraph (f)(i)(E)

[[Page 2199]]

clarifies that unless a SizeQuote request is properly canceled in 
accordance with paragraph (iv), a FB is obligated to execute the entire 
SizeQuote Order at a price that is not inferior to the NBBO in 
situations where there are no SizeQuote responses received or where 
such responses are inferior to the NBBO.
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    \6\ Pursuant to CBOE Rule 6.45A, ``Priority and Allocation of 
Trades for CBOE Hybrid System,'' in-crowd market participants 
include in-crowd Market-Makers, an in-crowd DPM, and a floor broker 
representing orders in the trading crowd.
    \7\ CBOE Rule 8.7(d), ``Market Making Obligations Applicable to 
Hybrid Classes,'' requires Market-Makers to respond to any request 
by a FB for a market with a legal-width (as defined in CBOE Rule 
8.7(b)(iv)), 10-contract minimum size quote in classes trading on 
the CBOE Hybrid System.
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    After the conclusion of time during which interested ICMPs have 
been given the opportunity to provide their indications, the FB will 
execute the SizeQuote Order he is holding with ICMPs or with a 
facilitation order, or both, in accordance with the following 
procedures: \8\
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    \8\ The FB will execute the SizeQuote Order either with ICMPs or 
with a firm facilitation order, or both, in accordance with the 
requirements of paragraph (ii).
---------------------------------------------------------------------------

    Executing the SizeQuote order at ICMP's best price: ICMPs that 
provided SizeQuote responses at the highest bid or lowest offer (``best 
price'') have priority to trade with the SizeQuote Order at that best 
price. For example, assume a FB requests a SizeQuote and ICMPs respond 
with a market quote of $1.00--1.20 for 1,000 contracts. This quote 
constitutes the ``best price'' and those ICMPs that responded have 
priority at those prices.\9\ If the FB chooses to trade at either of 
those prices, the SizeQuote Order will be allocated pro-rata to those 
ICMPs that responded with a quote at the best price, up to the size of 
their respective quotes.\10\ If in the above example the SizeQuote 
Order is for more than 1,000 contracts, the FB must trade the balance 
with a facilitation order at the best price. ICMPs that did not respond 
to the SizeQuote request would not be eligible to participate in the 
allocation of this trade.
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    \9\ Public customers in the electronic book have priority to 
trade with a SizeQuote Order over any ICMP providing a SizeQuote 
response at the same price as the order in the electronic book. See 
proposed CBOE Rule 6.74(f)(i)(C). This example assumes there are no 
public customer orders at the SizeQuote response price.
    \10\ There will be no DPM participation entitlement in SizeQuote 
trades, even if the DPM is among those ICMPs quoting at the best 
price.
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    Executing the order at a price that improves upon ICMP's price by 
one minimum increment: \11\ ICMPs that provided SizeQuote responses at 
the best price (``eligible ICMPs'') have priority to trade with the 
SizeQuote Order at a price equal to one minimum increment better than 
the best price (``improved best price''). Accordingly, using the 
example above, eligible ICMPs, if they desire, have priority at prices 
of $1.05 and $1.15 of up to 1,000 contracts.\12\ If the FB chooses to 
trade at either of those prices, the SizeQuote Order will be allocated 
pro-rata at the improved best price to those eligible ICMPs that 
responded with a quote at the best price, up to the size of their 
respective quotes. If the SizeQuote Order is for more than 1,000 
contracts, the FB must trade the balance with a facilitation order at 
the improved best price. ICMPs that did not respond to the SizeQuote 
request would not be eligible to participate in the allocation of this 
trade.
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    \11\ Minimum increments are governed by CBOE Rule 6.42, 
``Minimum Increments for Bids and Offers.'' The term ``minimum 
increment'' is synonymous with ``trading increment.''
    \12\ Obviously, there is no obligation requiring an ICMP to 
trade at a price that is better than his/her verbal quote.
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    Trading at a price that improves upon ICMP's price by more than one 
minimum increment: A FB may execute the entire SizeQuote Order with a 
facilitation order at a price two minimum increments better than the 
best price communicated by the ICMPs in their responses to the 
SizeQuote request. Using the example above, a FB could trade the 
SizeQuote Order with a facilitation order at $1.10. ICMPs would not be 
able to participate in the trade at that price.
    The Exchange also proposes to adopt new paragraph (iv) to 
explicitly state that it will be a violation of a FB's duty of best 
execution to its customer if it were to cancel a SizeQuote Order to 
avoid execution of the order at a better price. The availability of the 
SizeQuote Mechanism does not alter a FB's best execution duty to get 
the best price for its customer. A SizeQuote request can be canceled 
prior to the receipt by the FB of responses to the SizeQuote request. 
Once the floor broker receives a response to the SizeQuote request, if 
he/she were to cancel the order and then subsequently attempt to 
execute the order at an inferior price to the previous SizeQuote 
response, there would be a presumption that the FB did so to avoid 
execution of its customer order in whole or in part by others at the 
better price.
    The Exchange represents that it will provide to the Commission at 
the end of the pilot period a report summarizing the effectiveness of 
the SizeQuote program. Pending a report that indicates that the 
SizeQuote program has been successful, the Exchange anticipates 
submitting a rule filing that either requests extension of the 
SizeQuote program or permanent approval of the pilot.
    The Exchange believes that the SizeQuote proposal provides a well-
balanced mechanism that enhances the trading crowd's ability to quote 
competitively and participate in open outcry trades while at the same 
time it creates a process that gives greater certainty to FBs in the 
execution of large orders. Under the proposal, ICMPs not only will have 
priority at the price of the quote they give in response to a SizeQuote 
request, but they also will have priority, if they want it, at a price 
that is one trading increment better than their quote. FBs will now 
have more certainty in that ICMPs will have one opportunity to respond 
with a quote response and if they do not, they will not participate in 
the trade. Moreover, once an ICMP gives his/her best price (i.e., 
SizeQuote response), he/she may not subsequently change the terms of 
that response after the FB announces its intention to trade, although 
the ICMP will have priority at a price that is one trading increment 
better than his/her quote. This further enhances ICMPs' incentives to 
quote competitively.
    The Exchange also believes that the proposal enhances an ICMP's 
incentive to quote competitively by giving complete priority at not 
only his/her price but also at one trading increment better than his/
her SizeQuote response. For these reasons, 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.\13\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the section 6(b)(5) \14\ 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 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 written comments on the 
proposed rule change.

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

[[Page 2200]]

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 self-regulatory organization 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 (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2004-72 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-72. 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 (https://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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. 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-2004-72 and should be submitted on or before February 2, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-67 Filed 1-11-05; 8:45 am]
BILLING CODE 8010-01-P
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