Self-Regulatory Organizations; Order Approving Proposed Rule Change and Amendments No. 1 and 2 Thereto by the Chicago Board Options Exchange, Incorporated Relating to the Introduction of Remote Market-Makers, 13217-13222 [E5-1185]
Download as PDF
<![CDATA[
Federal Register / Vol. 70, No. 52 / Friday, March 18, 2005 / Notices
the Paperwork Reduction Act of 1995
which provides opportunity for public
comment on new or revised data
collections, the Railroad Retirement
Board (RRB) will publish periodic
summaries of proposed data collections.
Comments are invited on: (a) Whether
the proposed information collection is
necessary for the proper performance of
the functions of the agency, including
whether the information has practical
utility; (b) the accuracy of the RRB’s
estimate of the burden of the collection
of the information; (c) ways to enhance
the quality, utility, and clarity of the
information to be collected; and (d)
ways to minimize the burden related to
the collection of information on
respondents, including the use of
automated collection techniques or
other forms of information technology.
Title and Purpose of Information
Collection
Application for Reimbursement for
Hospital Insurance Services in Canada;
OMB 3220–0086. Under section 7(d) of
the Railroad Retirement Act (RRA), the
RRB administers the Medicare program
for persons covered by the railroad
retirement system. Payments are
provided under section 7(d)4) of the
RRA for medical services furnished in
Canada to the same extent as for those
furnished in the United States.
However, payments for the services
furnished in Canada are made from the
Railroad Retirement Account rather
than from the Federal Hospital
Insurance Trust Fund, with the
payments limited to the amount by
which insurance benefits under
Medicare exceed the amounts payable
under Canadian Provincial plans.
Form AA–104, Application for
Canadian Hospital Benefits Under
Medicare—Part A, is provided by the
RRB for use in claiming benefits for
covered hospital services received in
Canada. The form obtains information
needed to determine eligibility for, and
the amount of any reimbursement due
the applicant. One response is requested
of each respondent. Completion is
required to obtain a benefit.
No changes are proposed to Form
AA–104.
Number of respondents: 50.
Estimated completion time: 10
minutes.
Estimated annual burden hours: 8.
Additional Information or Comments:
To request more information or to
obtain a copy of the information
collection justification, forms, and/or
supporting material, please call the RRB
Clearance Officer at (312) 751–3363 or
send an e-mail request to
Charles.Mierzwa@RRB.GOV. Comments
VerDate jul<14>2003
16:14 Mar 17, 2005
Jkt 205001
regarding the information collection
should be addressed to Ronald J.
Hodapp, Railroad Retirement Board, 844
North Rush Street, Chicago, Illinois
60611–2092 or send an e-mail to
Ronald.Hodapp@RRB.GOV. Written
comments should be received within 60
days of this notice.
Charles Mierzwa,
Clearance Officer.
[FR Doc. 05–5419 Filed 3–17–05; 8:45 am]
BILLING CODE 7905–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting
13217
Dated: March 15, 2005.
Jonathan G. Katz,
Secretary.
[FR Doc. 05–5463 Filed 3–15–05; 4:18 pm]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51366; File No. SR–CBOE–
2004–75]
Self-Regulatory Organizations; Order
Approving Proposed Rule Change and
Amendments No. 1 and 2 Thereto by
the Chicago Board Options Exchange,
Incorporated Relating to the
Introduction of Remote Market-Makers
March 14, 2005.
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold the following
meeting during the week of March 21,
2005:
A Closed Meeting will be held on
Tuesday, March 22, 2005 at 2:30 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters may also be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), (9)(B), and
(10) and 17 CFR 200.402(a)(3), (5), (7),
9(ii) and (10), permit consideration of
the scheduled matters at the Closed
Meeting.
Commissioner Glassman, as duty
officer, voted to consider the items
listed for the closed meeting in closed
session.
The subject matter of the Closed
Meeting scheduled for Tuesday, March
22, 2005, will be:
Formal orders of investigations;
Institution and settlement of injunctive
actions; and Institution and settlement
of administrative proceedings of an
enforcement nature.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
942–7070.
PO 00000
Frm 00059
Fmt 4703
Sfmt 4703
I. Introduction
On November 22, 2004, the Chicago
Board Options Exchange, Incorporated
(‘‘CBOE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’), 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 relating to the introduction of
Remote Market-Makers (‘‘RMMs’’). On
January 10, 2005, CBOE filed
Amendment No. 1 to the proposed rule
change.3
On January 21, 2005, CBOE filed
Amendment No. 2 to the proposed rule
change.4 The proposed rule change and
Amendments No. 1 and 2 were
published for comment in the Federal
Register on February 4, 2005.5 The
Commission received no comment
letters on the proposal. This order
approves the proposed rule change and
Amendments No. 1 and 2.
II. Discussion
CBOE’s Hybrid Trading System
merges the electronic and open outcry
trading models, offering market
participants the ability to stream
electronically their own firm
disseminated market quotes
representing their trading interest. The
current Hybrid rules allow market
makers to stream electronic quotes only
when they are physically present in
their appointed trading stations. This
requirement prevents ‘‘remote market
making,’’ a practice whereby market
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 replaces and supersedes
CBOE’s original 19b–4 filing in its entirety.
4 Amendment No. 2 replaces and supersedes
CBOE’s original 19b–4 filing and Amendment No.
1 in their entirety.
5 Securities Exchange Act Release No. 51107
(January 31, 2005), 70 FR 6051.
2 17
E:\FR\FM\18MRN1.SGM
18MRN1
13218
Federal Register / Vol. 70, No. 52 / Friday, March 18, 2005 / Notices
makers may submit quotes from
locations outside of the physical trading
station for that class.
The proposed rule change would
accommodate remote market making, by
authorizing a new membership status
called RMM. RMMs would have the
ability to submit quotes to the CBOE
from a location outside of the physical
trading station for the subject class. To
accommodate RMMs, the Exchange
proposes to amend existing, and adopt
new, rules addressing RMM obligations,
RMM appointments, Priority and
Allocation of Trades, and Evaluation of
RMMs.
After careful review, the Commission
finds that the proposed rule change, as
amended, 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
of the Act.7 Specifically, the
Commission finds that the proposal to
add a new category of options marketmaking participant, RMMs, to the CBOE
Hybrid trading platform is consistent
with Section 6(b)(5) of the Act 8 in that
the proposal has been designed to
promote just and equitable principles of
trade, and to protect investors and the
public interest.
A. Registration and Appointment of
RMMs
The Exchange proposes to adopt new
Rule 8.4 to address the definitional,
registration, affiliation, and
appointment issues relating to RMMs.9
Proposed CBOE Rule 8.4(a) defines an
RMM as an individual member or
member organization registered with the
Exchange that makes transactions as a
dealer-specialist from a location other
than the physical trading station for the
subject class.10 The rule also proposes
that transactions of RMMs that are
executed on the Exchange are deemed
market maker transactions for purposes
of Chapter VIII of the CBOE Rules and
CBOE Rules 3.1 and 12.3(f).
Proposed Rule 8.4(b), Registration and
Approval of RMMs, provides that the
registration and approval of RMMs
would be in accordance with CBOE
6 The Commission has considered the amended
proposed rule change’s impact on efficiency,
competition, and capital formation.15 U.S.C. 78c(f).
7 15 U.S.C. 78f.
8 15 U.S.C. 78f(b)(5).
9 The Exchange also proposes to amend Rule 8.3
to clarify its non-applicability to RMMs.
10 The Exchange proposes to amend CBOE Rule
8.1 to eliminate from the definition of MarketMaker the requirement that transactions be effected
on the trading floor. Transactions by market makers
that comply with the requirements of CBOE Rule
8.7.03 would be considered market maker
transactions.
VerDate jul<14>2003
16:14 Mar 17, 2005
Jkt 205001
Rule 8.2.11 As a result, RMMs would be
approved in the same manner that other
market makers are approved and any
member approved as a market maker
would be approved as an RMM upon
requesting RMM status with the
Exchange’s Membership department.
Importantly, the Commission notes that
CBOE has no authority under its rules
to discriminate among applicants. An
RMM retains its approval to act as an
RMM until the RMM requests the
Exchange to relieve it of its approval to
act as an RMM and the Exchange grants
such approval or until the Exchange
terminates its approval to act as an
RMM pursuant to Exchange Rules.12
Paragraph (d) of CBOE Rule 8.4
provides that an RMM may choose
either a Physical Trading Crowd
(‘‘PTC’’) or Virtual Trading Crowd
(‘‘VTC’’) appointment.
A PTC Appointment would
correspond to the location of a physical
trading station on the floor of the CBOE.
An RMM that chooses a PTC
appointment would have the right to
quote electronically (and not in open
outcry): 30 Hybrid 2.0 Platform
(‘‘Hybrid 2.0’’ or ‘‘Hybrid 2.0 Platform’’)
products traded in that specific trading
station for each Exchange membership it
owns; 13 or 20 Hybrid 2.0 products
traded in that specific trading station for
each Exchange membership it leases.14
A VTC Appointment would confer the
right to quote electronically (and not in
open outcry) an appropriate number of
products selected from ‘‘tiers’’ that have
been structured according to trading
volume statistics. By being able to
choose the products it wishes to trade,
an RMM would have flexibility in
choosing and structuring its
appointment. As proposed, RMMs
would be able to choose from all
products included in the Hybrid 2.0
Platform. Of those products, Tier A
would consist of the 20% most activelytraded products over the preceding
three calendar months, Tier B the next
20%, etc., through Tier E, which would
consist of the 20% least actively-traded
products. All products within a specific
Tier would be assigned an
‘‘appointment cost’’ depending upon its
Tier location. Each Tier A product
11 The Exchange proposes a corresponding
change to CBOE Rule 8.2(a) to provide that
applicants must pass a member’s exam as opposed
to a floor member’s exam.
12 The termination of an RMM’s approval to act
as an RMM would be pursuant to proposed CBOE
Rules 8.61 or 8.4(e).
13 The Exchange proposes in CBOE Rule 1.1(aaa)
definitions for Hybrid Trading System and Hybrid
2.0 Platform.
14 For purposes of this rule, the term ‘‘product’’
refers to all options of the same single underlying
security/value.
PO 00000
Frm 00060
Fmt 4703
Sfmt 4703
would have an ‘‘appointment cost’’ of
.10, each Tier B product would be .0667,
each Tier C product would be .05, each
Tier D product would be .04, and each
Tier E product would be .033. An RMM
as part of its VTC appointment may
select for each membership it owns or
leases any combination of Hybrid 2.0
products whose aggregate ‘‘appointment
cost’’ does not exceed 1.0. For example,
an RMM could request six ‘‘A Tier’’
products (6x.10), four ‘‘C Tier’’ products
(4x.05), and five ‘‘D Tier’’ products
(5x.04) to constitute its VTC
appointment.
The Exchange would rebalance the
‘‘tiers’’ once each calendar quarter,
which may result in additions or
deletions to their composition. When a
product changes ‘‘tiers’’ it would be
assigned the ‘‘appointment cost’’ of that
tier. Upon rebalancing, each RMM with
a VTC appointment would be required
to own or lease the appropriate number
of Exchange memberships reflecting the
revised ‘‘appointment costs’’ of the
products constituting its appointment.
The Commission believes the proposed
PTC and VTC appointment rules are
consistent with the Act.
B. Affiliations Among Market Makers
Proposed CBOE Rule 8.4 (c) provides
that, except as specified in the rule, an
RMM may not have an appointment as
an RMM in any class in which it or its
member organization serves as
Designated Primary Market-Maker
(‘‘DPM’’), electronic DPM (‘‘e-DPM’’),
RMM, or market maker on CBOE. The
Commission believes this prohibition is
important because of the potential
under CBOE’s rules for allocations of
trades to be based, in part, on an equal
allocation methodology. Under an equal
allocation methodology, a participant
can be allocated contracts based solely
on its quote or order at the best bid or
offer, regardless of the size of such
participant’s quote or order.
Accordingly, absent a prohibition, there
could be an incentive for affiliated
market makers to each post separate
quotes to increase their total contract
allocation.
1. Affiliated Floor Market-Maker Pilot
Program
CBOE Rule 8.4(b) would provide
exception to this general prohibition to
allow a CBOE Member or Member Firm
operating as an RMM in a class to have,
as part of an 18-month pilot program,
one market maker affiliated with the
RMM organization trading in open
outcry in any specific option class
E:\FR\FM\18MRN1.SGM
18MRN1
Federal Register / Vol. 70, No. 52 / Friday, March 18, 2005 / Notices
allocated to the RMM.15 The
Commission is approving this limited
exception on a pilot basis because CBOE
represents that firms do not want to
have an RMM and a market maker to
increase their allocation of contracts in
electronic trades, but instead to be able
to both make electronic markets
remotely and to participate outcry
trading.
2. Multiple Aggregation Units
CBOE Rule 8.4(c) would also allow a
CBOE Member or Member Firm to have,
as part of a 12-month pilot program,
multiple aggregation units operating as
separate RMMs within the same class,
provided specific criteria are satisfied.
CBOE has stated there are three primary
instances in which this proposed
multiple aggregation unit exception
would be utilized.
• First, large broker-dealers are
frequently divided into desks that
pursue separate trading strategies, and
each of these trading desks may be
interested in serving in an RMM
capacity. Without an aggregation unit
exception, each broker-dealer would be
limited to only one RMM, regardless of
the number of trading desks it employs
and regardless of the degree of
autonomy or separation between each
desk.
• Second, a common organizational
structure utilized by CBOE market
makers involves a common financial
backer providing capital to multiple
independent, unaffiliated market
makers. Each of these market makers
trades independently and has its own
profit-loss account that is separate and
distinct from that of the other market
makers receiving financial backing from
the same entity. Without an aggregation
unit exception, these independent
market makers could be viewed as
affiliated and thus be precluded from
being RMMs in the same classes.
• Third, given the rapidly escalating
costs of acquiring sophisticated quoting
technology, many market makers, in an
15 As part of the pilot program, CBOE represents
that it would confidentially provide the
Commission with data on: (1) The size of orders
that RMMs and affiliated market makers both trade
with electronically; (2) the price and size of the
RMM’s and the affiliated market maker’s respective
quotes; (3) the price and size of quotes of other
participants in classes where an RMM and an
affiliate are quoting; and (4) a breakdown of how
orders are allocated to the RMM, the affiliated
market maker, and any other participants. The
Commission will use this data to consider whether
the practice of allowing a member organization to
receive more of an allocation of orders based solely
on the number of market-makers that it has quoting
in an option class is unfairly discriminatory in any
way to other quoting market participants, and to
determine whether to extend or permanently
approve this practice.
VerDate jul<14>2003
16:14 Mar 17, 2005
Jkt 205001
effort to reduce their operating costs,
have pooled resources to acquire such
technology. Despite the shared expenses
and pooled resources, these market
makers continue to operate
independently with their own separate
profit-loss accounts, which are
unaffected by the profitability (or lack
thereof) of others with whom they have
shared costs/pooled resources. Without
the ability for each market maker to be
treated as an aggregation unit, these
market makers would be precluded from
trading as RMMs within the same
classes.
In this regard, CBOE proposes to
allow multiple aggregation units to
operate as RMMs in the same class
provided they comply with the
following criteria: 16
• The member or member firm has a
written plan of organization that
identifies each aggregation unit,
specifies its trading objective(s), and
supports its independent identity. The
independence of aggregation units may
be evidenced by separate management
structures, location, business purpose,
or separate profit-and-loss treatment
within the member firm. Each
aggregation unit must maintain all
trading activity of that aggregation unit
in a segregated account, which would be
reported to the Exchange as such.
• Each aggregation unit must operate
independently of other aggregation units
of the member or member firm.
Moreover, all traders in an aggregation
unit may pursue only the trading
objectives or strategy(ies) of that
aggregation unit and may not transmit
or otherwise share information relating
to those trading objectives or strategies
to the member’s or member firm’s other
aggregation units. The member or
member firm may have risk
management personnel outside of the
RMM aggregation units view the
positions of the multiple RMMs within
the entity and direct position
adjustments for risk management
purposes. However, such persons may
not transmit information to traders in an
RMM aggregation unit about the trading
strategies, objectives, or positions of
another RMM aggregation unit.17 Prior
16 The Exchange based these criteria on the
criteria contained in Regulation SHO, which was
recently adopted by the Commission. Securities
Exchange Act Release No. 50103 (July 28, 2004), 69
FR 48008 (August 6, 2004) (File No. S7–23–03).
17 Senior risk management personnel are
prohibited from engaging in any of the following
activities with respect to the Aggregation Units they
oversee: (i) Establishing quoting parameters for any
trader including but not limited to delta and
volatility values; (ii) directing the submission of
specific quotes by any trader; or (iii) directing the
timing of a trader’s trading activities with anything
other than general, nonspecific timeframes.
PO 00000
Frm 00061
Fmt 4703
Sfmt 4703
13219
to being approved in an RMM capacity,
each member or member organization
operating multiple Aggregation Units
would be required to certify that it is
aware of these prohibitions, that it
would comply with these prohibitions,
and that it would ensure continued
compliance with these prohibitions.
• Individual traders are assigned to
only one aggregation unit at any time;
and
• The member or member firm as part
of its compliance and/or internal audit
routines establishes and maintains
surveillance and audit procedures that
facilitate the review and surveillance
programs of the firm and CBOE to
ensure the independent operation of the
separate aggregation units operating as
RMMs. As part of these routines, the
member or member firm must retain
written records of information
concerning the aggregation units,
including, but not limited to, trading
personnel, names of personnel making
trading decisions, unusual trading
activities, disciplinary action resulting
from a breach of the member or member
firm’s systems firewalls and
information-sharing policies, and the
transfer of securities between the
members or member firm’s aggregation
units, which information would be
promptly made available to the
Exchange upon its request. The member
or member firm must promptly provide
to the Exchange a written report at such
time there is any material change with
respect to the aggregation units, at
which point the Exchange would
reexamine its status.
The Commission believes that the
proposed rules are designed to ensure
that affiliated RMMs are sufficiently
independent to allow them to operate as
separate RMMs. The Commission
believes such separation in important
because, as stated above, CBOE’s rules
allocate trades among market makers
quoting at the same price based, in part,
on an equal allocation methodology
unrelated to the size of each market
makers quote. Thus, multiple RMMs at
the same firm could be used to increase
total allocation to that firm without a
commensurate increase in the total size
of its quote. The Commission notes that
the proposed rule obligates the
Exchange to conduct surveillance to
ensure the independent operation of the
multiple units operating as RMMs.
C. Integrated Market Making and Sideby-Side Market Making
RMMs who effect transactions in a
particular option may be affiliated with
market makers or specialists who trade
the underlying security (i.e., integrated
market making). The Exchange has
E:\FR\FM\18MRN1.SGM
18MRN1
13220
Federal Register / Vol. 70, No. 52 / Friday, March 18, 2005 / Notices
indicated that CBOE Rule 4.18, which
governs the use of material, non-public
information would apply to RMMs. The
Exchange represents that this rule
would require RMMs to maintain
information barriers that are reasonably
designed to prevent the misuse of
material, non-public information by
such member with any affiliates that
may act as a specialist or market maker
in any security underlying the options
for which the CBOE member acts as an
RMM.18 The Commission believes that
the requirement that there be an
information barrier between the RMM
and its affiliates with respect to
transactions in the option and the
underlying security serve to reduce the
opportunity for unfair trading
advantages or misuse of material, nonpublic information.
D. Limitations on Access Due to Systems
Constraints
Because of limited systems bandwidth
capacity, the Exchange proposes to limit
the number of members quoting
electronically in each product traded on
Hybrid or Hybrid 2.0. The number of
members permitted to quote in each
product is specified in proposed CBOE
Rule 8.3A.01.19 The methodology for
18 Telephone conversation between Stephen M.
Youhn, Managing Senior Attorney, and Elizabeth
King, Associate Director, Division of Market
Regulation, March 10, 2005. See also Exchange Act
Release No. 47628 (Apr. 10, 2003), 68 FR 17697
(order approving CBOEdirect).
19 CBOE proposes that the CQL for all products
trading on the Hybrid Trading System would be
twenty-five (25).The CQLs for products trading on
the Hybrid 2.0 Platform would vary based on
trading volume over the preceding calendar quarter.
The CQL for all products newly-listed on the
Exchange after January 6, 2005 would be 25 until
such time that the CQL increases in accordance
with Rule 8.3A.01. The Exchange would announce
all changes regarding CQLs to the membership via
Information Circular. The Exchange may increase
the CQL levels by submitting to the SEC a rule filing
pursuant to Section 19(b)(3)(A) of the Act. The
Exchange may decrease the CQL levels established
above upon SEC approval of a rule filing submitted
pursuant to Section 19(b)(2) of the Act.
When exceptional circumstances warrant, the
President of the Exchange (or in his absence his
designee, who must be a Senior Vice President of
the Exchange or higher) may increase the CQL for
an existing or new product. ‘‘Exceptional
circumstances’’ refers to substantial trading volume,
whether actual or expected (e.g., in the case of a
new product or a major news announcement). The
Exchange does not intend for this discretion (i.e.,
to increase the CQL) to be exercised on an intra-day
basis. Rather, the primary instance for which the
Exchange anticipates this discretion being exercised
is for the addition of new products to Hybrid or
Hybrid 2.0 for where the standard CQL is not high
enough to accommodate the anticipated trading
volume and member demand. When the CQL
increases pursuant to the President exercising his
authority in accordance with this paragraph,
members on the wait-list (if applicable, with respect
to a product already trading on Hybrid), would have
first priority and remaining capacity would be filled
on a time priority basis. Upon cessation of the
VerDate jul<14>2003
16:14 Mar 17, 2005
Jkt 205001
determining which members would be
able to quote electronically in a product
is governed by proposed CBOE Rule
8.3A(a)–(c).
The CBOE proposes that the DPM and
e-DPMs (if applicable 20) assigned to the
product on January 6, 2005,21 and
market makers who: (1) Are in good
standing with the Exchange; and (2)(i)
have transacted at least 80% of their
Market-Maker contracts and
transactions in-person in each of the
three immediately preceding calendar
months prior to January 6, 2005 in
option products traded in the trading
station; or (ii) were physically present in
the trading station acting in the capacity
of a market maker on January 6, 2005,
would be entitled to quote electronically
in those products for as long as they
maintain an appointment of those
products.22
All other market makers, RMMs, and
approved e-DPMs that request the
ability to submit quotes electronically in
the subject product would be entitled to
quote electronically in that product in
the order in which they so request
provided the number of members
quoting electronically in the product
does not exceed the CQL. When the
number of members in the product
quoting electronically equals the CQL,
all other members requesting the ability
to quote electronically in that product
would be wait-listed in the order in
which they submitted the request.
The waiting list would operate based
on time priority. When the product can
accommodate another electronic quoter
(whether due to attrition or an increase
in the CQL), the member at the ‘‘top’’ of
the list (i.e., the member that has been
on the waiting list the longest amount
of time) would have priority. Once a
member is wait-listed, the Exchange
may not alter his/her position on the
wait-list other than to improve such
position (i.e., the Exchange may not
exceptional circumstances, the President (or his
designee), in his discretion, may determine to
reduce the CQL. Any reduction in the CQL must be
undertaken in accordance with the procedure
established for lowering the ‘‘increased CQL.’’ Any
actions taken by the President of the Exchange
pursuant to this paragraph (to increase or decrease
the CQL) would be submitted to the Commission in
a rule filing pursuant to Section 19(b)(3)(A) of the
Act.
20 Non-Hybrid 2.0 classes do not have e-DPMs.
21 The Commission understands that the CBOE
currently intends to file a proposed rule change to
change the January 6, 2005 date to a later date.
22 CBOE represents that the practical effect of this
rule is to ensure that the DPM, all market makers,
and all e-DPMs would be guaranteed the ability to
quote electronically in products trading at their
primary trading stations as of January 6, 2005.
CBOE further represents that there were no
products as of this date for which the number of
members quoting electronically exceeded the CQL
for that product.
PO 00000
Frm 00062
Fmt 4703
Sfmt 4703
place other members ahead of a
previously wait-listed member). If a
wait-listed member is offered, yet
refuses, the ability to quote
electronically in the subject product, the
member would be removed from that
waiting list.
With respect to a product that is
added to the Hybrid 2.0 Platform after
January 6, 2005, the DPM and e-DPMs
appointed to the product would also be
entitled to quote electronically. All
market makers quoting in the product
prior to its addition to the Hybrid 2.0
Platform would be entitled to quote
electronically provided that: (1) They
have transacted at least 80% of their
market maker contracts and transactions
in-person in each of the three
immediately preceding calendar months
prior to the product being added to the
Hybrid 2.0 Platform in option products
traded in the trading station; or (2) they
were physically present in the trading
station acting in the capacity of a market
maker on the day prior to the product
being added to the Hybrid 2.0 Platform.
The Exchange believes that these
standards, which also are contained in
paragraph (a) of this rule, would ensure
that market makers that maintained a
presence in the class prior to its
conversion to the Hybrid 2.0 Platform
would be guaranteed the ability to quote
electronically upon conversion to
Hybrid 2.0. If at the time a product is
added to the Hybrid 2.0 Platform the
aggregate number of DPMs, e-DPMs, and
market makers entitled to quote
electronically in the product exceeds
the CQL, then the product would have
an ‘‘increased CQL,’’ as described in
proposed Interpretations and Policies
.01(a). Reduction of any ‘‘increased
CQL’’ would be in accordance with the
procedures described in proposed
Interpretations and Policies .01(a).
All other members would be entitled
to quote electronically in that product in
the order in which they so request
provided the number of members
quoting electronically in the product
does not exceed the CQL. When the
number of members quoting
electronically in the product equals the
CQL, all other members would be waitlisted in the order in which they request
the ability to quote electronically. The
wait-list would operate as described in
proposed CBOE Rule 8.3A(a).
Finally, with respect to a new product
that commences trading on the Hybrid
Trading System after January 6, 2005,
the assigned DPM would be entitled to
quote electronically. Thereafter, all
other members would be entitled to
quote electronically in that product in
the order in which they so request
provided the number of members
E:\FR\FM\18MRN1.SGM
18MRN1
Federal Register / Vol. 70, No. 52 / Friday, March 18, 2005 / Notices
quoting electronically does not exceed
the CQL. When the number of members
quoting electronically in the product
equals the CQL, all other members
would be wait-listed in the order in
which they request the ability to quote
electronically. The wait-list would
operate as described in proposed CBOE
Rule 8.3A(a).
The Commission believes that CBOE’s
proposal to limit the number of market
makers quoting in each options class is
not unfairly discriminatory and is
otherwise consistent with the Act.
E. Obligations of RMMs
The Exchange proposes to amend
CBOE Rule 8.7 to clarify the obligations
applicable to RMMs. RMMs would not
be able to quote in open outcry.
Accordingly, the Exchange proposes to
amend paragraph (b)(iii) to specify the
permissible methods by which in-crowd
market makers and RMMs may quote or
submit orders.
The Exchange also proposes to amend
paragraph (d) of CBOE Rule 8.7, Market
Making Obligations Applicable in
Hybrid Classes, to exclude RMMs from
the application of this paragraph. RMMs
instead would be subject to the
obligations contained in new paragraph
(e), which are based on the Hybrid
obligations in CBOE Rule 8.7(d).
Specifically, RMMs would be required
to provide continuous two-sided, 10-up,
legal-width quotations in 60% of the
series of their appointed classes.23 The
Exchange would be permitted to
consider exceptions to this quoting
requirement based on demonstrated
legal or regulatory requirements or other
mitigating circumstances (e.g., excused
leaves of absence, personal emergencies,
or equipment problems). In addition,
proposed CBOE Rule 8.4(f) provides that
RMMs are subject to CBOE Rule 8.7.03A
with respect to trading in appointed
classes. CBOE Rule 8.7.03A requires at
least 75% of a Market-Maker’s total
contract volume (measured quarterly) be
in his/her appointed classes. RMMs may
not enter quotations in option classes
that are not included within their
23 If the underlying primary market disseminates
a 100-share quote, an RMM’s undecremented quote
may be for as low as 1-contract (‘‘1-up’’), however,
this ability is expressly conditioned on the process
being automated (i.e., an RMM may not manually
adjust its quotes to reflect 1-up sizes). Quotes must
automatically return to at least 10-up when the
underlying primary market no longer disseminates
a 100-share quote. RMMs that have not automated
this process may not avail themselves of the relief
provided herein. The ability to quote 1-up would
operate on a pilot basis and would terminate on
August 17, 2005, which is the same expiration date
contained in CBOE Rules 8.7(d)(i)(B) and (d)(ii)(B)
for Hybrid trading.
VerDate jul<14>2003
16:14 Mar 17, 2005
Jkt 205001
appointments although they may submit
orders in non-appointed classes.
The Commission believes that these
obligations for RMMs are consistent
with the Act. In particular, the
Commission believes that RMMs’
affirmative obligations are sufficient to
justify the benefits they receive as
market makers.24 In this regard, the
Commission believes that CBOE rules
impose such affirmative obligations on
RMMs.
F. Priority and Allocation of Trades for
CBOE Hybrid System
The Exchange proposes to amend
certain portions of CBOE Rule 6.45A
regarding allocation of trades on Hybrid.
The first change is to expand the
introductory paragraph definition of
‘‘market participant’’ to include RMMs.
The second proposed change is to
clarify in paragraph (a), Allocation of
Incoming Electronic Orders, that market
participants may enter quotes or orders
and receive allocations pursuant to the
Ultimate Matching Algorithm.
The third proposed change is to
amend paragraph (b), Allocation of
Orders Represented in Open Outcry, to
clarify that only in-crowd market
participants would be eligible to
participate in open outcry trade
allocations. This is consistent with the
prohibitions in CBOE Rules 8.4 and 8.7
that prevent an RMM from trading in
open outcry. The Exchange also
proposes to limit the duration of
paragraph (b) to six months from the
date of approval of this proposal, unless
otherwise extended.
The Commission believes that the
trade allocation algorithm that would
apply to RMMs is consistent with the
Act. The Commission believes that
treating RMMs and other CBOE Hybrid
market participants the same under
CBOE Rule 6.45A(a) should encourage
RMMs to quote competitively.
G. CBOE Membership Rules
CBOE proposes to amend CBOE Rule
3.2 to make clear that a member is
deemed to have an authorized trading
function if the member is approved to
act as a nominee or person registered for
an RMM organization. This would
ensure under CBOE Rule 3.9(g) that the
RMM nominee completes CBOE’s
Member Orientation Program and passes
CBOE’s Trading Member Qualification
Exam. The proposed amendments to
24 For example, a lender may extend credit to a
broker-dealer without regard to the restrictions in
Regulation T of the Board of Governors of the
Federal Reserve if the credit is to be used to finance
the broker-dealer’s activities as a specialist or
market maker on a national securities exchange. See
12 CFR 221.5(c)(6).
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
13221
CBOE Rules 3.2 and 3.3 would also
clarify that a member may elect
membership status as an RMM.
CBOE also proposes to amend CBOE
Rule 3.8(a)(ii), which currently states
that ‘‘if the member organization is the
owner or lessee of more than one such
membership, the organization must
designate a different individual to be the
nominee for each of the memberships
(except that this subparagraph would
not apply to memberships designated
for use in an e-DPM capacity pursuant
to CBOE Rule 8.92 by a member
organization approved as an e-DPM).’’
Proposed CBOE Rule 3.8.02 would
accommodate the creation of RMMs by
allowing a member organization to
designate one individual to be the
nominee of the memberships that are
designated for use in an RMM capacity
and an e-DPM capacity, provided that a
member organization may not have
more than one RMM appointment in an
option class (except to the extent
provided in CBOE Rule 8.4(c)) and may
not have an RMM appointment in an
option class in which the organization
serves as a DPM, e-DPM, or MarketMaker on the Exchange (except to the
extent provided in CBOE Rule 8.4(c)).
The Commission believes that this
exception to the general rule that a
member organization must designate a
different individual to be the nominee
for each of the memberships would not
be inappropriate given that RMMs
operate from locations outside of the
trading crowds for their applicable
option classes, thereby making it
possible for a member to act as an
nominee on more than one
membership.25
Proposed CBOE Rule 3.8.02(ii) would
also permit an individual to act as a
nominee of an organization with respect
to one membership utilized in an RMM
capacity and a membership not utilized
in an RMM or e-DPM capacity in order
to allow the nominee to use those
memberships to simultaneously trade as
an in-crowd Market-Maker and in an
RMM capacity (but not in the same
classes), provided that the RMM trading
activity of the nominee is from a
location other than the physical trading
station for any of the classes traded by
the nominee in an RMM capacity.
The Commission believes that this
provision is reasonable and should
accommodate members who choose to
take advantage of their remote market
making privileges while on the
Exchange floor.
25 The Commission notes that it would not be
possible for an in-crowd market participant to act
as nominee on more than one membership because
such participant would be unable to physically be
present in more than one trading crowd.
E:\FR\FM\18MRN1.SGM
18MRN1
13222
Federal Register / Vol. 70, No. 52 / Friday, March 18, 2005 / Notices
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act.26
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,27 that the
proposed rule change (SR–CBOE–2004–
75), as amended, is approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.28
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–1185 Filed 3–17–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51365; File No. SR–FICC–
2004–15]
Self-Regulatory Organizations; The
Fixed Income Clearing Corporation;
Notice of Filing of an Amended
Proposed Rule Change Relating to
Trade Submission Requirements and
Pre-Netting
March 14, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that on
March 4, 2005, The Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) an
amendment to a proposed rule change
as described in Items I, II, and III below.
Prior to being amended the proposed
rule change was published in the
Federal Register on November 4, 2004.2
The Commission is publishing this
notice to solicit comments on the
proposed rule change as amended.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
As previously noticed, the proposed
rule change would amend the rules of
FICC’s Government Securities Division
(‘‘GSD’’) to broaden its trade submission
requirements and to prohibit pre-netting
activities of certain affiliates of its
members. As amended, the proposed
rule change would also require netting
26 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
28 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 Securities Exchange Act Release No. 50607
(October 29, 2004), 69 FR 64343.
27 15
VerDate jul<14>2003
16:14 Mar 17, 2005
Jkt 205001
members to report foreign affiliate
trades to FICC.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FICC 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. FICC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of such statements.3
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The proposed rule change as
originally filed would require GSD
members of FICC to submit data on
trades executed or whose settlement is
cleared and guaranteed by affiliates of
GSD members that are registered brokerdealers, banks, or futures commission
merchants organized in the U.S.
Because the proposed rule would define
a covered affiliate as an entity organized
in the U.S., the rule would not apply to
trades executed by non-U.S. affiliates of
GSD members.
FICC has filed an amendment to the
proposed rule change that would
require a netting member to report
foreign affiliate trades to FICC. The
trades would be reported to FICC on an
annual basis in the format and within
the timeframe specified by guidelines to
be issued by FICC. The reporting
requirement would not apply to foreign
affiliate trades of a foreign affiliate that
has executed less than an average of 30
or more foreign affiliate trades per
business day during any one-month
period within the prior year.
The amendment proposes to add
definitions of ‘‘foreign affiliate’’ and
‘‘foreign affiliate trade’’ to GSD’s rules.
A ‘‘foreign affiliate’’ would be defined
as an affiliate of a netting member that
is not itself a netting member and is a
foreign person. A ‘‘foreign affiliate
trade’’ would be defined as a trade
executed by a ‘‘foreign affiliate’’ of a
netting member that satisfies the
following criteria: (i) The trade is
eligible for netting pursuant to GSD’s
rules and (ii) the trade is executed with
another netting member, with a covered
affiliate, or with a ‘‘foreign affiliate’’ of
another netting member. ‘‘Foreign
3 The Commission has modified the text of the
summaries prepared by FICC.
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
affiliate trade’’ would not include a
trade that is executed between a
member and its affiliate or between
affiliates of the same member. For
purposes of this definition, the term
‘‘executed’’ shall include trades that are
cleared and guaranteed as to their
settlement by the foreign affiliate.
The proposed rule change is
consistent with the requirements of
Section 17A of the Act 4 and the rules
and regulations thereunder applicable to
FICC because the proposed rule change
should reduce systemic risk in the
government securities marketplace and
therefore facilitate the establishment of
a national system for the prompt and
accurate clearance and settlement of
securities transactions.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
FICC does not believe that the
proposed rule change would have any
impact or impose any burden on
competition.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments relating to the
proposed rule change have not yet been
solicited or received. FICC will notify
the Commission of any written
comments received by FICC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within thirty five 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
ninety 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 the 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:
4 15
E:\FR\FM\18MRN1.SGM
U.S.C. 78q–1.
18MRN1
]]>Agencies
[Federal Register Volume 70, Number 52 (Friday, March 18, 2005)]
[Notices]
[Pages 13217-13222]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-1185]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51366; File No. SR-CBOE-2004-75]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendments No. 1 and 2 Thereto by the Chicago Board Options
Exchange, Incorporated Relating to the Introduction of Remote Market-
Makers
March 14, 2005.
I. Introduction
On November 22, 2004, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC''), 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 relating to the
introduction of Remote Market-Makers (``RMMs''). On January 10, 2005,
CBOE filed Amendment No. 1 to the proposed rule change.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaces and supersedes CBOE's original 19b-
4 filing in its entirety.
---------------------------------------------------------------------------
On January 21, 2005, CBOE filed Amendment No. 2 to the proposed
rule change.\4\ The proposed rule change and Amendments No. 1 and 2
were published for comment in the Federal Register on February 4,
2005.\5\ The Commission received no comment letters on the proposal.
This order approves the proposed rule change and Amendments No. 1 and
2.
---------------------------------------------------------------------------
\4\ Amendment No. 2 replaces and supersedes CBOE's original 19b-
4 filing and Amendment No. 1 in their entirety.
\5\ Securities Exchange Act Release No. 51107 (January 31,
2005), 70 FR 6051.
---------------------------------------------------------------------------
II. Discussion
CBOE's Hybrid Trading System merges the electronic and open outcry
trading models, offering market participants the ability to stream
electronically their own firm disseminated market quotes representing
their trading interest. The current Hybrid rules allow market makers to
stream electronic quotes only when they are physically present in their
appointed trading stations. This requirement prevents ``remote market
making,'' a practice whereby market
[[Page 13218]]
makers may submit quotes from locations outside of the physical trading
station for that class.
The proposed rule change would accommodate remote market making, by
authorizing a new membership status called RMM. RMMs would have the
ability to submit quotes to the CBOE from a location outside of the
physical trading station for the subject class. To accommodate RMMs,
the Exchange proposes to amend existing, and adopt new, rules
addressing RMM obligations, RMM appointments, Priority and Allocation
of Trades, and Evaluation of RMMs.
After careful review, the Commission finds that the proposed rule
change, as amended, 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 of the Act.\7\ Specifically, the Commission finds that the proposal
to add a new category of options market-making participant, RMMs, to
the CBOE Hybrid trading platform is consistent with Section 6(b)(5) of
the Act \8\ in that the proposal has been designed to promote just and
equitable principles of trade, and to protect investors and the public
interest.
---------------------------------------------------------------------------
\6\ The Commission has considered the amended proposed rule
change's impact on efficiency, competition, and capital formation.15
U.S.C. 78c(f).
\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Registration and Appointment of RMMs
The Exchange proposes to adopt new Rule 8.4 to address the
definitional, registration, affiliation, and appointment issues
relating to RMMs.\9\ Proposed CBOE Rule 8.4(a) defines an RMM as an
individual member or member organization registered with the Exchange
that makes transactions as a dealer-specialist from a location other
than the physical trading station for the subject class.\10\ The rule
also proposes that transactions of RMMs that are executed on the
Exchange are deemed market maker transactions for purposes of Chapter
VIII of the CBOE Rules and CBOE Rules 3.1 and 12.3(f).
---------------------------------------------------------------------------
\9\ The Exchange also proposes to amend Rule 8.3 to clarify its
non-applicability to RMMs.
\10\ The Exchange proposes to amend CBOE Rule 8.1 to eliminate
from the definition of Market-Maker the requirement that
transactions be effected on the trading floor. Transactions by
market makers that comply with the requirements of CBOE Rule 8.7.03
would be considered market maker transactions.
---------------------------------------------------------------------------
Proposed Rule 8.4(b), Registration and Approval of RMMs, provides
that the registration and approval of RMMs would be in accordance with
CBOE Rule 8.2.\11\ As a result, RMMs would be approved in the same
manner that other market makers are approved and any member approved as
a market maker would be approved as an RMM upon requesting RMM status
with the Exchange's Membership department. Importantly, the Commission
notes that CBOE has no authority under its rules to discriminate among
applicants. An RMM retains its approval to act as an RMM until the RMM
requests the Exchange to relieve it of its approval to act as an RMM
and the Exchange grants such approval or until the Exchange terminates
its approval to act as an RMM pursuant to Exchange Rules.\12\
---------------------------------------------------------------------------
\11\ The Exchange proposes a corresponding change to CBOE Rule
8.2(a) to provide that applicants must pass a member's exam as
opposed to a floor member's exam.
\12\ The termination of an RMM's approval to act as an RMM would
be pursuant to proposed CBOE Rules 8.61 or 8.4(e).
---------------------------------------------------------------------------
Paragraph (d) of CBOE Rule 8.4 provides that an RMM may choose
either a Physical Trading Crowd (``PTC'') or Virtual Trading Crowd
(``VTC'') appointment.
A PTC Appointment would correspond to the location of a physical
trading station on the floor of the CBOE. An RMM that chooses a PTC
appointment would have the right to quote electronically (and not in
open outcry): 30 Hybrid 2.0 Platform (``Hybrid 2.0'' or ``Hybrid 2.0
Platform'') products traded in that specific trading station for each
Exchange membership it owns; \13\ or 20 Hybrid 2.0 products traded in
that specific trading station for each Exchange membership it
leases.\14\
---------------------------------------------------------------------------
\13\ The Exchange proposes in CBOE Rule 1.1(aaa) definitions for
Hybrid Trading System and Hybrid 2.0 Platform.
\14\ For purposes of this rule, the term ``product'' refers to
all options of the same single underlying security/value.
---------------------------------------------------------------------------
A VTC Appointment would confer the right to quote electronically
(and not in open outcry) an appropriate number of products selected
from ``tiers'' that have been structured according to trading volume
statistics. By being able to choose the products it wishes to trade, an
RMM would have flexibility in choosing and structuring its appointment.
As proposed, RMMs would be able to choose from all products included in
the Hybrid 2.0 Platform. Of those products, Tier A would consist of the
20% most actively-traded products over the preceding three calendar
months, Tier B the next 20%, etc., through Tier E, which would consist
of the 20% least actively-traded products. All products within a
specific Tier would be assigned an ``appointment cost'' depending upon
its Tier location. Each Tier A product would have an ``appointment
cost'' of .10, each Tier B product would be .0667, each Tier C product
would be .05, each Tier D product would be .04, and each Tier E product
would be .033. An RMM as part of its VTC appointment may select for
each membership it owns or leases any combination of Hybrid 2.0
products whose aggregate ``appointment cost'' does not exceed 1.0. For
example, an RMM could request six ``A Tier'' products (6x.10), four ``C
Tier'' products (4x.05), and five ``D Tier'' products (5x.04) to
constitute its VTC appointment.
The Exchange would rebalance the ``tiers'' once each calendar
quarter, which may result in additions or deletions to their
composition. When a product changes ``tiers'' it would be assigned the
``appointment cost'' of that tier. Upon rebalancing, each RMM with a
VTC appointment would be required to own or lease the appropriate
number of Exchange memberships reflecting the revised ``appointment
costs'' of the products constituting its appointment. The Commission
believes the proposed PTC and VTC appointment rules are consistent with
the Act.
B. Affiliations Among Market Makers
Proposed CBOE Rule 8.4 (c) provides that, except as specified in
the rule, an RMM may not have an appointment as an RMM in any class in
which it or its member organization serves as Designated Primary
Market-Maker (``DPM''), electronic DPM (``e-DPM''), RMM, or market
maker on CBOE. The Commission believes this prohibition is important
because of the potential under CBOE's rules for allocations of trades
to be based, in part, on an equal allocation methodology. Under an
equal allocation methodology, a participant can be allocated contracts
based solely on its quote or order at the best bid or offer, regardless
of the size of such participant's quote or order. Accordingly, absent a
prohibition, there could be an incentive for affiliated market makers
to each post separate quotes to increase their total contract
allocation.
1. Affiliated Floor Market-Maker Pilot Program
CBOE Rule 8.4(b) would provide exception to this general
prohibition to allow a CBOE Member or Member Firm operating as an RMM
in a class to have, as part of an 18-month pilot program, one market
maker affiliated with the RMM organization trading in open outcry in
any specific option class
[[Page 13219]]
allocated to the RMM.\15\ The Commission is approving this limited
exception on a pilot basis because CBOE represents that firms do not
want to have an RMM and a market maker to increase their allocation of
contracts in electronic trades, but instead to be able to both make
electronic markets remotely and to participate outcry trading.
---------------------------------------------------------------------------
\15\ As part of the pilot program, CBOE represents that it would
confidentially provide the Commission with data on: (1) The size of
orders that RMMs and affiliated market makers both trade with
electronically; (2) the price and size of the RMM's and the
affiliated market maker's respective quotes; (3) the price and size
of quotes of other participants in classes where an RMM and an
affiliate are quoting; and (4) a breakdown of how orders are
allocated to the RMM, the affiliated market maker, and any other
participants. The Commission will use this data to consider whether
the practice of allowing a member organization to receive more of an
allocation of orders based solely on the number of market-makers
that it has quoting in an option class is unfairly discriminatory in
any way to other quoting market participants, and to determine
whether to extend or permanently approve this practice.
---------------------------------------------------------------------------
2. Multiple Aggregation Units
CBOE Rule 8.4(c) would also allow a CBOE Member or Member Firm to
have, as part of a 12-month pilot program, multiple aggregation units
operating as separate RMMs within the same class, provided specific
criteria are satisfied. CBOE has stated there are three primary
instances in which this proposed multiple aggregation unit exception
would be utilized.
First, large broker-dealers are frequently divided into
desks that pursue separate trading strategies, and each of these
trading desks may be interested in serving in an RMM capacity. Without
an aggregation unit exception, each broker-dealer would be limited to
only one RMM, regardless of the number of trading desks it employs and
regardless of the degree of autonomy or separation between each desk.
Second, a common organizational structure utilized by CBOE
market makers involves a common financial backer providing capital to
multiple independent, unaffiliated market makers. Each of these market
makers trades independently and has its own profit-loss account that is
separate and distinct from that of the other market makers receiving
financial backing from the same entity. Without an aggregation unit
exception, these independent market makers could be viewed as
affiliated and thus be precluded from being RMMs in the same classes.
Third, given the rapidly escalating costs of acquiring
sophisticated quoting technology, many market makers, in an effort to
reduce their operating costs, have pooled resources to acquire such
technology. Despite the shared expenses and pooled resources, these
market makers continue to operate independently with their own separate
profit-loss accounts, which are unaffected by the profitability (or
lack thereof) of others with whom they have shared costs/pooled
resources. Without the ability for each market maker to be treated as
an aggregation unit, these market makers would be precluded from
trading as RMMs within the same classes.
In this regard, CBOE proposes to allow multiple aggregation units
to operate as RMMs in the same class provided they comply with the
following criteria: \16\
---------------------------------------------------------------------------
\16\ The Exchange based these criteria on the criteria contained
in Regulation SHO, which was recently adopted by the Commission.
Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR
48008 (August 6, 2004) (File No. S7-23-03).
---------------------------------------------------------------------------
The member or member firm has a written plan of
organization that identifies each aggregation unit, specifies its
trading objective(s), and supports its independent identity. The
independence of aggregation units may be evidenced by separate
management structures, location, business purpose, or separate profit-
and-loss treatment within the member firm. Each aggregation unit must
maintain all trading activity of that aggregation unit in a segregated
account, which would be reported to the Exchange as such.
Each aggregation unit must operate independently of other
aggregation units of the member or member firm. Moreover, all traders
in an aggregation unit may pursue only the trading objectives or
strategy(ies) of that aggregation unit and may not transmit or
otherwise share information relating to those trading objectives or
strategies to the member's or member firm's other aggregation units.
The member or member firm may have risk management personnel outside of
the RMM aggregation units view the positions of the multiple RMMs
within the entity and direct position adjustments for risk management
purposes. However, such persons may not transmit information to traders
in an RMM aggregation unit about the trading strategies, objectives, or
positions of another RMM aggregation unit.\17\ Prior to being approved
in an RMM capacity, each member or member organization operating
multiple Aggregation Units would be required to certify that it is
aware of these prohibitions, that it would comply with these
prohibitions, and that it would ensure continued compliance with these
prohibitions.
---------------------------------------------------------------------------
\17\ Senior risk management personnel are prohibited from
engaging in any of the following activities with respect to the
Aggregation Units they oversee: (i) Establishing quoting parameters
for any trader including but not limited to delta and volatility
values; (ii) directing the submission of specific quotes by any
trader; or (iii) directing the timing of a trader's trading
activities with anything other than general, nonspecific timeframes.
---------------------------------------------------------------------------
Individual traders are assigned to only one aggregation
unit at any time; and
The member or member firm as part of its compliance and/or
internal audit routines establishes and maintains surveillance and
audit procedures that facilitate the review and surveillance programs
of the firm and CBOE to ensure the independent operation of the
separate aggregation units operating as RMMs. As part of these
routines, the member or member firm must retain written records of
information concerning the aggregation units, including, but not
limited to, trading personnel, names of personnel making trading
decisions, unusual trading activities, disciplinary action resulting
from a breach of the member or member firm's systems firewalls and
information-sharing policies, and the transfer of securities between
the members or member firm's aggregation units, which information would
be promptly made available to the Exchange upon its request. The member
or member firm must promptly provide to the Exchange a written report
at such time there is any material change with respect to the
aggregation units, at which point the Exchange would reexamine its
status.
The Commission believes that the proposed rules are designed to
ensure that affiliated RMMs are sufficiently independent to allow them
to operate as separate RMMs. The Commission believes such separation in
important because, as stated above, CBOE's rules allocate trades among
market makers quoting at the same price based, in part, on an equal
allocation methodology unrelated to the size of each market makers
quote. Thus, multiple RMMs at the same firm could be used to increase
total allocation to that firm without a commensurate increase in the
total size of its quote. The Commission notes that the proposed rule
obligates the Exchange to conduct surveillance to ensure the
independent operation of the multiple units operating as RMMs.
C. Integrated Market Making and Side-by-Side Market Making
RMMs who effect transactions in a particular option may be
affiliated with market makers or specialists who trade the underlying
security (i.e., integrated market making). The Exchange has
[[Page 13220]]
indicated that CBOE Rule 4.18, which governs the use of material, non-
public information would apply to RMMs. The Exchange represents that
this rule would require RMMs to maintain information barriers that are
reasonably designed to prevent the misuse of material, non-public
information by such member with any affiliates that may act as a
specialist or market maker in any security underlying the options for
which the CBOE member acts as an RMM.\18\ The Commission believes that
the requirement that there be an information barrier between the RMM
and its affiliates with respect to transactions in the option and the
underlying security serve to reduce the opportunity for unfair trading
advantages or misuse of material, non-public information.
---------------------------------------------------------------------------
\18\ Telephone conversation between Stephen M. Youhn, Managing
Senior Attorney, and Elizabeth King, Associate Director, Division of
Market Regulation, March 10, 2005. See also Exchange Act Release No.
47628 (Apr. 10, 2003), 68 FR 17697 (order approving CBOEdirect).
---------------------------------------------------------------------------
D. Limitations on Access Due to Systems Constraints
Because of limited systems bandwidth capacity, the Exchange
proposes to limit the number of members quoting electronically in each
product traded on Hybrid or Hybrid 2.0. The number of members permitted
to quote in each product is specified in proposed CBOE Rule
8.3A.01.\19\ The methodology for determining which members would be
able to quote electronically in a product is governed by proposed CBOE
Rule 8.3A(a)-(c).
---------------------------------------------------------------------------
\19\ CBOE proposes that the CQL for all products trading on the
Hybrid Trading System would be twenty-five (25).The CQLs for
products trading on the Hybrid 2.0 Platform would vary based on
trading volume over the preceding calendar quarter. The CQL for all
products newly-listed on the Exchange after January 6, 2005 would be
25 until such time that the CQL increases in accordance with Rule
8.3A.01. The Exchange would announce all changes regarding CQLs to
the membership via Information Circular. The Exchange may increase
the CQL levels by submitting to the SEC a rule filing pursuant to
Section 19(b)(3)(A) of the Act. The Exchange may decrease the CQL
levels established above upon SEC approval of a rule filing
submitted pursuant to Section 19(b)(2) of the Act.
When exceptional circumstances warrant, the President of the
Exchange (or in his absence his designee, who must be a Senior Vice
President of the Exchange or higher) may increase the CQL for an
existing or new product. ``Exceptional circumstances'' refers to
substantial trading volume, whether actual or expected (e.g., in the
case of a new product or a major news announcement). The Exchange
does not intend for this discretion (i.e., to increase the CQL) to
be exercised on an intra-day basis. Rather, the primary instance for
which the Exchange anticipates this discretion being exercised is
for the addition of new products to Hybrid or Hybrid 2.0 for where
the standard CQL is not high enough to accommodate the anticipated
trading volume and member demand. When the CQL increases pursuant to
the President exercising his authority in accordance with this
paragraph, members on the wait-list (if applicable, with respect to
a product already trading on Hybrid), would have first priority and
remaining capacity would be filled on a time priority basis. Upon
cessation of the exceptional circumstances, the President (or his
designee), in his discretion, may determine to reduce the CQL. Any
reduction in the CQL must be undertaken in accordance with the
procedure established for lowering the ``increased CQL.'' Any
actions taken by the President of the Exchange pursuant to this
paragraph (to increase or decrease the CQL) would be submitted to
the Commission in a rule filing pursuant to Section 19(b)(3)(A) of
the Act.
---------------------------------------------------------------------------
The CBOE proposes that the DPM and e-DPMs (if applicable \20\)
assigned to the product on January 6, 2005,\21\ and market makers who:
(1) Are in good standing with the Exchange; and (2)(i) have transacted
at least 80% of their Market-Maker contracts and transactions in-person
in each of the three immediately preceding calendar months prior to
January 6, 2005 in option products traded in the trading station; or
(ii) were physically present in the trading station acting in the
capacity of a market maker on January 6, 2005, would be entitled to
quote electronically in those products for as long as they maintain an
appointment of those products.\22\
---------------------------------------------------------------------------
\20\ Non-Hybrid 2.0 classes do not have e-DPMs.
\21\ The Commission understands that the CBOE currently intends
to file a proposed rule change to change the January 6, 2005 date to
a later date.
\22\ CBOE represents that the practical effect of this rule is
to ensure that the DPM, all market makers, and all e-DPMs would be
guaranteed the ability to quote electronically in products trading
at their primary trading stations as of January 6, 2005. CBOE
further represents that there were no products as of this date for
which the number of members quoting electronically exceeded the CQL
for that product.
---------------------------------------------------------------------------
All other market makers, RMMs, and approved e-DPMs that request the
ability to submit quotes electronically in the subject product would be
entitled to quote electronically in that product in the order in which
they so request provided the number of members quoting electronically
in the product does not exceed the CQL. When the number of members in
the product quoting electronically equals the CQL, all other members
requesting the ability to quote electronically in that product would be
wait-listed in the order in which they submitted the request.
The waiting list would operate based on time priority. When the
product can accommodate another electronic quoter (whether due to
attrition or an increase in the CQL), the member at the ``top'' of the
list (i.e., the member that has been on the waiting list the longest
amount of time) would have priority. Once a member is wait-listed, the
Exchange may not alter his/her position on the wait-list other than to
improve such position (i.e., the Exchange may not place other members
ahead of a previously wait-listed member). If a wait-listed member is
offered, yet refuses, the ability to quote electronically in the
subject product, the member would be removed from that waiting list.
With respect to a product that is added to the Hybrid 2.0 Platform
after January 6, 2005, the DPM and e-DPMs appointed to the product
would also be entitled to quote electronically. All market makers
quoting in the product prior to its addition to the Hybrid 2.0 Platform
would be entitled to quote electronically provided that: (1) They have
transacted at least 80% of their market maker contracts and
transactions in-person in each of the three immediately preceding
calendar months prior to the product being added to the Hybrid 2.0
Platform in option products traded in the trading station; or (2) they
were physically present in the trading station acting in the capacity
of a market maker on the day prior to the product being added to the
Hybrid 2.0 Platform. The Exchange believes that these standards, which
also are contained in paragraph (a) of this rule, would ensure that
market makers that maintained a presence in the class prior to its
conversion to the Hybrid 2.0 Platform would be guaranteed the ability
to quote electronically upon conversion to Hybrid 2.0. If at the time a
product is added to the Hybrid 2.0 Platform the aggregate number of
DPMs, e-DPMs, and market makers entitled to quote electronically in the
product exceeds the CQL, then the product would have an ``increased
CQL,'' as described in proposed Interpretations and Policies .01(a).
Reduction of any ``increased CQL'' would be in accordance with the
procedures described in proposed Interpretations and Policies .01(a).
All other members would be entitled to quote electronically in that
product in the order in which they so request provided the number of
members quoting electronically in the product does not exceed the CQL.
When the number of members quoting electronically in the product equals
the CQL, all other members would be wait-listed in the order in which
they request the ability to quote electronically. The wait-list would
operate as described in proposed CBOE Rule 8.3A(a).
Finally, with respect to a new product that commences trading on
the Hybrid Trading System after January 6, 2005, the assigned DPM would
be entitled to quote electronically. Thereafter, all other members
would be entitled to quote electronically in that product in the order
in which they so request provided the number of members
[[Page 13221]]
quoting electronically does not exceed the CQL. When the number of
members quoting electronically in the product equals the CQL, all other
members would be wait-listed in the order in which they request the
ability to quote electronically. The wait-list would operate as
described in proposed CBOE Rule 8.3A(a).
The Commission believes that CBOE's proposal to limit the number of
market makers quoting in each options class is not unfairly
discriminatory and is otherwise consistent with the Act.
E. Obligations of RMMs
The Exchange proposes to amend CBOE Rule 8.7 to clarify the
obligations applicable to RMMs. RMMs would not be able to quote in open
outcry. Accordingly, the Exchange proposes to amend paragraph (b)(iii)
to specify the permissible methods by which in-crowd market makers and
RMMs may quote or submit orders.
The Exchange also proposes to amend paragraph (d) of CBOE Rule 8.7,
Market Making Obligations Applicable in Hybrid Classes, to exclude RMMs
from the application of this paragraph. RMMs instead would be subject
to the obligations contained in new paragraph (e), which are based on
the Hybrid obligations in CBOE Rule 8.7(d). Specifically, RMMs would be
required to provide continuous two-sided, 10-up, legal-width quotations
in 60% of the series of their appointed classes.\23\ The Exchange would
be permitted to consider exceptions to this quoting requirement based
on demonstrated legal or regulatory requirements or other mitigating
circumstances (e.g., excused leaves of absence, personal emergencies,
or equipment problems). In addition, proposed CBOE Rule 8.4(f) provides
that RMMs are subject to CBOE Rule 8.7.03A with respect to trading in
appointed classes. CBOE Rule 8.7.03A requires at least 75% of a Market-
Maker's total contract volume (measured quarterly) be in his/her
appointed classes. RMMs may not enter quotations in option classes that
are not included within their appointments although they may submit
orders in non-appointed classes.
---------------------------------------------------------------------------
\23\ If the underlying primary market disseminates a 100-share
quote, an RMM's undecremented quote may be for as low as 1-contract
(``1-up''), however, this ability is expressly conditioned on the
process being automated (i.e., an RMM may not manually adjust its
quotes to reflect 1-up sizes). Quotes must automatically return to
at least 10-up when the underlying primary market no longer
disseminates a 100-share quote. RMMs that have not automated this
process may not avail themselves of the relief provided herein. The
ability to quote 1-up would operate on a pilot basis and would
terminate on August 17, 2005, which is the same expiration date
contained in CBOE Rules 8.7(d)(i)(B) and (d)(ii)(B) for Hybrid
trading.
---------------------------------------------------------------------------
The Commission believes that these obligations for RMMs are
consistent with the Act. In particular, the Commission believes that
RMMs' affirmative obligations are sufficient to justify the benefits
they receive as market makers.\24\ In this regard, the Commission
believes that CBOE rules impose such affirmative obligations on RMMs.
---------------------------------------------------------------------------
\24\ For example, a lender may extend credit to a broker-dealer
without regard to the restrictions in Regulation T of the Board of
Governors of the Federal Reserve if the credit is to be used to
finance the broker-dealer's activities as a specialist or market
maker on a national securities exchange. See 12 CFR 221.5(c)(6).
---------------------------------------------------------------------------
F. Priority and Allocation of Trades for CBOE Hybrid System
The Exchange proposes to amend certain portions of CBOE Rule 6.45A
regarding allocation of trades on Hybrid. The first change is to expand
the introductory paragraph definition of ``market participant'' to
include RMMs. The second proposed change is to clarify in paragraph
(a), Allocation of Incoming Electronic Orders, that market participants
may enter quotes or orders and receive allocations pursuant to the
Ultimate Matching Algorithm.
The third proposed change is to amend paragraph (b), Allocation of
Orders Represented in Open Outcry, to clarify that only in-crowd market
participants would be eligible to participate in open outcry trade
allocations. This is consistent with the prohibitions in CBOE Rules 8.4
and 8.7 that prevent an RMM from trading in open outcry. The Exchange
also proposes to limit the duration of paragraph (b) to six months from
the date of approval of this proposal, unless otherwise extended.
The Commission believes that the trade allocation algorithm that
would apply to RMMs is consistent with the Act. The Commission believes
that treating RMMs and other CBOE Hybrid market participants the same
under CBOE Rule 6.45A(a) should encourage RMMs to quote competitively.
G. CBOE Membership Rules
CBOE proposes to amend CBOE Rule 3.2 to make clear that a member is
deemed to have an authorized trading function if the member is approved
to act as a nominee or person registered for an RMM organization. This
would ensure under CBOE Rule 3.9(g) that the RMM nominee completes
CBOE's Member Orientation Program and passes CBOE's Trading Member
Qualification Exam. The proposed amendments to CBOE Rules 3.2 and 3.3
would also clarify that a member may elect membership status as an RMM.
CBOE also proposes to amend CBOE Rule 3.8(a)(ii), which currently
states that ``if the member organization is the owner or lessee of more
than one such membership, the organization must designate a different
individual to be the nominee for each of the memberships (except that
this subparagraph would not apply to memberships designated for use in
an e-DPM capacity pursuant to CBOE Rule 8.92 by a member organization
approved as an e-DPM).'' Proposed CBOE Rule 3.8.02 would accommodate
the creation of RMMs by allowing a member organization to designate one
individual to be the nominee of the memberships that are designated for
use in an RMM capacity and an e-DPM capacity, provided that a member
organization may not have more than one RMM appointment in an option
class (except to the extent provided in CBOE Rule 8.4(c)) and may not
have an RMM appointment in an option class in which the organization
serves as a DPM, e-DPM, or Market-Maker on the Exchange (except to the
extent provided in CBOE Rule 8.4(c)).
The Commission believes that this exception to the general rule
that a member organization must designate a different individual to be
the nominee for each of the memberships would not be inappropriate
given that RMMs operate from locations outside of the trading crowds
for their applicable option classes, thereby making it possible for a
member to act as an nominee on more than one membership.\25\
---------------------------------------------------------------------------
\25\ The Commission notes that it would not be possible for an
in-crowd market participant to act as nominee on more than one
membership because such participant would be unable to physically be
present in more than one trading crowd.
---------------------------------------------------------------------------
Proposed CBOE Rule 3.8.02(ii) would also permit an individual to
act as a nominee of an organization with respect to one membership
utilized in an RMM capacity and a membership not utilized in an RMM or
e-DPM capacity in order to allow the nominee to use those memberships
to simultaneously trade as an in-crowd Market-Maker and in an RMM
capacity (but not in the same classes), provided that the RMM trading
activity of the nominee is from a location other than the physical
trading station for any of the classes traded by the nominee in an RMM
capacity.
The Commission believes that this provision is reasonable and
should accommodate members who choose to take advantage of their remote
market making privileges while on the Exchange floor.
[[Page 13222]]
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5) of the Act.\26\
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-CBOE-2004-75), as amended,
is approved.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
---------------------------------------------------------------------------
\28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1185 Filed 3-17-05; 8:45 am]
BILLING CODE 8010-01-P
