Securities: Suspension of trading— Chicago Board Options Exchange, Inc., 3579-3582 [E6-662]
Agencies
[Federal Register: January 23, 2006 (Volume 71, Number 14)]
[Notices]
[Page 3579-3582]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ja06-104]
[[Page 3579]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53112; File No. SR-CBOE-2004-21]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change To Establish
Rules for a Screen-Based Trading System for Non-option Securities
January 12, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 14, 2004, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I, II, and III below, which Items have been
substantially prepared by the Exchange. On January 11, 2006, CBOE
submitted 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 replaced the original rule filing in its
entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to adopt rules governing the trading of non-option
securities on CBOEdirect, the Exchange's screen-based trading platform.
The proposed new system would be called the Stock Trading on CBOEdirect
System (``STOC System'' or ``System''). The text of the proposed rule
change is available at CBOE's Web site (https://www.cboe.org/legal/default.aspx
), at CBOE's principal office, and at the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CBOE included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. CBOE has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As an Intermarket Trading System (``ITS'') participant, CBOE trades
a small number of non-option securities.\4\ These products are not
traded on CBOE's options trading platform. Instead, they trade on
CBOE's stand-alone stock platform in an open-outcry environment
pursuant to Chapter XXX (30) of CBOE's rules. In 2003, the Commission
approved Chapters XL (40) through XLVI (46) of CBOE's rules,\5\ which
established a purely screen-based trading platform for the trading of
options on CBOE.\6\ That screen-based platform is commonly referred to
as CBOEdirect, and components of that system have been successfully
used to create CBOE's Hybrid Trading System (currently in use for
options trading), to facilitate the trading of single-stock futures by
OneChicago, and to trade security futures products on the newly-created
CBOE Futures Exchange.\7\ CBOE now proposes to adopt a new set of rules
as Chapters L (50) through LV (55) of CBOE's rules to allow for the
trading of non-option securities in a purely screen-based environment.
CBOEdirect would be the foundation for this platform. CBOE intends that
all products currently traded under Chapter 30 would migrate to the new
platform and trade pursuant to Chapters 50-55. The proposed new
platform is called the Stock Trading on CBOEdirect System, or STOC
System. The STOC System would be substantially similar to CBOE's
screen-based platform for options in that it (1) would be entirely
screen-based; (2) would utilize a DPM/LMM-driven model with optional
supplemental liquidity provided by STOC Market-Makers; (3) would
utilize a configurable matching algorithm based on either price-time or
pro-rata priority with optional priority overlays; and (4) would
integrate all quotes and orders entered into the system into the STOC
book.
---------------------------------------------------------------------------
\4\ Currently, CBOE trades four such products.
\5\ See Securities Exchange Act Release No. 47628 (April 3,
2003), 68 FR 17697 (April 10, 2003) (approving SR-CBOE-00-55); see
also Securities Exchange Act Release No. 45829 (April 25, 2002), 67
FR 31002 (May 8, 2002) (notice of filing of SR-CBOE-00-55).
\6\ At this time, CBOE does not trade options pursuant to
Chapters 40-46.
\7\ CBOE represents that these different uses of the CBOEdirect
platform have not had, and will not have, an adverse affect on
trading or the stability of the platform.
---------------------------------------------------------------------------
CBOE believes the STOC System would greatly enhance the trading of
stock products on the Exchange. Unlike CBOE's current non-option
security trading system, the STOC System would be fully integrated with
ITS to facilitate the sending and receipt of ITS Commitments. It would
automatically execute marketable orders against CBOE's quote up to the
size of the quote (assuming such executions would not cause an
impermissible trade-through of another exchange's quote). STOC Market-
Maker quotes and all orders (customer or otherwise) would be integrated
into the STOC Book. Further, the audit trail process would be greatly
simplified for regulatory purposes.
Almost all of the rules contained in proposed Chapters 50-55 are
substantially identical to previously approved rules contained in
Chapters 30 and 40-46 of CBOE's rules. Of course, not all the rules
from those chapters are proposed to be adopted for the STOC System
rules--only ones that would be appropriate for screen-based stock
trading. Any new rules or material modifications to the rules proposed
to be adopted from Chapters 30 and 40-46 are explained below.
Chapter 50
This chapter provides an introduction to the STOC System by setting
forth definitions (including definitions of the various market
participant types), explaining the application of other CBOE rules,
setting forth the registration process for members,\8\ stating
communication access guidelines, and establishing a limitation on
liability with respect to certain reporting authorities. All of the
rules in this chapter come from Chapters 40 and 41 of CBOE's rules,
except for proposed CBOE Rule 50.7, Limitation on Reporting
Authorities' Liability, which is based on CBOE Rule 30.55.
---------------------------------------------------------------------------
\8\ With respect to the registration process for members, any
Exchange member who chooses to participate on the STOC System must
apply with the Exchange to act as a STOC Market-Maker, STOC Broker,
or Proprietary Trader in accordance with proposed CBOE Rule 50.4.
Such applications must be submitted to the Exchange Membership
Committee for approval pursuant to CBOE Rule 3.9. CBOE Rule 3.9
provides that an applicant must submit an application in a form and
manner prescribed by the Exchange and describes the application
procedures and process for approval or disapproval.
---------------------------------------------------------------------------
Chapter 51
This chapter contains rules concerning operational matters--for
example, business hours, units of trading, minimum increments for bids
and offers, and types or orders handled. Proposed CBOE Rules 51.1,
51.2, 51.4, 51.5, 51.7, and 51.8 through 51.11 are rules that can also
be found in Chapter
[[Page 3580]]
30. CBOE Rule 51.3 is based on current CBOE Rule 42.2.
Chapter 52
This chapter contains proposed trading and order processing rules
for the STOC System. Proposed CBOE Rule 52.1 describes the System's
matching algorithm and governs priority on the System. It is similar to
CBOE Rule 43.1, which governs priority for options orders. As proposed,
the appropriate STOC Trading Committee would apply one of two priority
schemes, on a security-by-security basis. Trades would be allocated by
the System pursuant to either price-time priority or pro-rata priority.
Once one of those two priority schemes is in place, the appropriate
STOC Trading Committee could implement additional optional priority
overlays. Namely, an additional priority could be provided to public
customer orders, the market turner, or to the STOC DPM/LMM (CBOE's
specialist equivalent) \9\ as part of a participation entitlement.\10\
Thus, if pro-rata priority were in place for a particular security, and
the market turner, public customer, and trade participation right
overlays were in place (in that order of priority), incoming marketable
orders would be allocated by the System to all participants in pro-rata
fashion after the participant that first established that price (the
market turner), any public customers resting at the best price, and the
STOC DPM/LMM for the product (assuming its order and/or quote is at the
best price) have been satisfied (in that order). As part of the
participation right, the STOC DPM/LMM could never receive a quantity
larger than the size of its quote. The participation right percentage
would be established pursuant to proposed CBOE Rule 53.56 by the STOC
DPM Committee and could not exceed 40%. Any participant (including a
public customer) could be a market turner.
---------------------------------------------------------------------------
\9\ Throughout the proposed rules, references to STOC DPMs are
also applicable to STOC LMMs (which are essentially rotating STOC
DPMs). A product cannot have both a STOC DPM and a STOC LMM
appointed to it. See proposed CBOE Rule 53.51 (defining STOC LMM).
\10\ Proposed CBOE Rule 52.1(b)(3)(C) provides that the
participation entitlement may not be in effect unless the public
customer priority is in effect and ahead of the participation
entitlement in the priority sequence.
---------------------------------------------------------------------------
Proposed CBOE Rule 52.2 would govern the System's opening
procedures. The opening would occur in one of two ways, depending on
whether CBOE was the primary market for a security. If CBOE were the
primary market, the System would calculate a price point at which the
most pre-opening buy and sell orders could be matched (based on share
volume) and then execute those orders to establish an opening price and
open trading. If CBOE were not the primary market, the STOC DPM/LMM
would open the security at a single price that matches the primary
market or at a price that does not trade-through another exchange's
quotes. This would allow the STOC DPM to assess the quantity and
balance of pre-opening orders and to interact with the primary market
as necessary via ITS.
Proposed CBOE Rule 52.4 would govern ``clearly erroneous''
transactions executed on the Exchange. The proposed rule sets forth the
procedure for requesting Exchange review, the review procedures, and
the steps taken in the event of system disruption or malfunction. The
Exchange notes that this proposed rule is based on PCX Equities
(``PCXE'') Rule 7.10, which governs clearly erroneous executions.
Proposed CBOE Rule 52.6 would govern market order processing. It
provides that market orders would automatically execute against the
STOC Book (including against orders behind the best price at varying
price points) until the order is fully executed or until such execution
would result in an impermissible trade-through.\11\ To the extent a
market order is not automatically executed against the STOC book
because CBOE is not the NBBO, the System would ``flash'' the order at
the NBBO price to STOC Market-Makers on the System (to see if they
would match or improve the NBBO) for a period of time not to exceed
three seconds. After such time, if the order has not been traded, the
System will route it to the STOC DPM/LMM for manual handling (which
would allow the DPM/LMM to transmit an ITS commitment on behalf of the
order).
---------------------------------------------------------------------------
\11\ In most cases any trade-through would be impermissible, but
the Commission has provided a temporary 3-tick exemption for certain
products. See Securities Exchange Act Release No. 46428 (August 28,
2002), 67 FR 56607 (September 4, 2002) (order implementing the
exemption as a pilot program); Securities Exchange Act Release No.
52382 (September 6, 2005), 70 FR 53695 (September 9, 2005) (order
extending pilot program through June 28, 2006). Any such exemption
would be factored into what can automatically execute on the STOC
System.
---------------------------------------------------------------------------
Proposed CBOE Rule 52.7, which would govern limit order processing,
provides that limit orders would be booked by the System and that they
would not automatically execute at prices inferior to the NBBO. When a
limit order is received that is marketable against the quote of another
exchange but not marketable on CBOE, the System would ``flash'' the
order at its limit price to STOC Traders on the System (to see if they
would match or improve the NBBO) for a period of time not to exceed
three seconds. After such time, if the limit order has not been traded,
the System would route it to the STOC DPM/LMM for manual handling
(which would allow the DPM/LMM to transmit an ITS Commitment on behalf
of the limit order).
Proposed CBOE Rule 52.8 provides that market odd-lot orders would
be executed against STOC Market-Maker interest on the STOC Book
provided such interest equals the NBBO. If no STOC Market-Makers are
quoting at the NBBO, odd-lot orders would route to the STOC DPM/LMM for
execution. Limit odd lot orders would execute against the STOC DPM/LMM
if (i) the limit price is marketable against the STOC DPM/LMM quote, or
(ii) a trade occurs at the limit price on another exchange. Pre-opening
odd lot orders that are marketable against the opening price would
receive the opening price.
Proposed CBOE Rule 52.10 would provide that the System would
automatically execute inbound ITS Commitments against the best prices
available in the STOC Book to the extent such commitments are
marketable. When an ITS Commitment is not marketable against the STOC
Book, the System would ``flash'' the commitment at its limit price to
STOC Traders on the System (to see if they would match or improve the
NBBO) for a period of time not to exceed 3 seconds. After such time,
any unexecuted portion would be cancelled by the System. Inbound market
ITS Commitments would be executed at the NBBO or cancelled.
Proposed CBOE Rule 52.11(a) governs the facilitation of the non-
option security portion of option-related complex orders. This rule
defines a complex order as an order involving one or more option order
components and one or more non-option security order components. Such
facilitation transactions would be entered into the STOC System at a
price at or within the prevailing quotation for the non-option security
at the time the options portion of the complex orders are executed. The
non-option security portion of the order would have priority at that
price irrespective of pre-existing bids and offers and any priority
designations in place pursuant to proposed CBOE Rule 52.1, provided
that the option order component(s) bettered the corresponding bid
(offer) in the options market on which they were executed.
Proposed CBOE Rule 52.11(b), regarding crossing transactions on the
STOC System, provides that a STOC Trader that wishes to cross two
original orders or to facilitate an original order
[[Page 3581]]
must first send a Request for Quote (RFQ) with size. Within 10-30
seconds, as determined by the appropriate STOC Trading Committee, from
the conclusion of the RFQ response period, the orders may, at the STOC
Trader's discretion, be crossed (i) between the bid-offer if the
transaction would be less than 25,000 shares; or (ii) at or between the
bid-offer if the transaction would be greater than 25,000 shares and in
which case the cross transaction will have priority. The cross
transaction information would be received and effected by the
Exchange's Help Desk.
The remaining rules in proposed Chapter 52 are taken from existing
CBOE rules. CBOE Rule 52.3 (Unusual Market Conditions) is based on
existing CBOE Rule 30.5, and CBOE Rules 52.5 (Order Entry and
Maintenance), 52.13 (Firm Quotations), and 52.14 (Quote and Trading
Information) are based on rules contained in Chapter 30. CBOE Rule 52.9
(Processing of Requests for Quotes) is based on existing CBOE Rule
43.11.
Chapter 53
The chapter relates to requirements and obligations of members,
both generally and by participant type (e.g., STOC DPM, STOC Broker,
etc.). Proposed Section A carries over Chapter 30 rules that currently
apply to all members trading non-option securities on CBOE. They relate
to matters such as trading in member accounts, members acting as
brokers, short sale requirements, and doing business with the public.
Proposed Section B contains provisions that are applicable to all
STOC Market-Makers (including STOC DPMs/LMMs). These provisions are
based on similar provisions that apply to SBT Market-Makers trading
options under Chapters 40-46. Accordingly, the registration and
appointment process for STOC Market-Makers is identical to the process
in place for SBT Market-Makers. Further, STOC Market-Maker obligations,
as set forth in proposed CBOE Rule 53.23, are centered on RFQ response
requirements. STOC Market-Makers that are not providing a two-sided
quote at the time of an RFQ would have to respond to the RFQs with a
two-sided market that must last in duration for at least 30 seconds
(unless traded) and for a minimum size designated by the appropriate
STOC Market Performance Committee. As part of their obligations, STOC
Market-Makers would be required to respond to at least 75% of all RFQs
in their appointed securities.
Proposed Section C sets forth additional considerations and
requirements applicable to STOC DPMs and LMMs. As previously stated, a
STOC LMM essentially would be a rotating STOC DPM. There would never be
a STOC DPM and STOC LMM for the same security. As with the STOC Market-
Maker provisions, these provisions are patterned after rules in Chapter
44. STOC DPMs/LMMs would be required to provide continuous two-sided
markets in assigned securities and to handle customer orders received
by the STOC System that are not automatically executed or booked. Thus,
STOC DPMs/LMMs would have dealer and agent functions and obligations.
Proposed Sections D and E relate to definitions and requirements
applicable to STOC Brokers and Clearing Firm Brokers. These provisions
are identical to provisions in Chapter 45.
Chapters 54 and 55
Proposed Chapter 54 sets forth additional provisions that would be
applicable to certain product types that could trade on the STOC
System. These product types, which include index portfolio receipts
(IPRs) \12\ and Index Portfolio Shares (IPSs),\13\ are currently
available for trading on CBOE under Chapter 30. All of the proposed
rules in this Chapter are identical to rules contained in Chapter 30.
Proposed Chapter 55 contains CBOE's ITS-related rules, which are
modeled on PCXE's ITS rules. CBOE deemed those an appropriate model
because, like the proposed STOC system, PCXE is an all-electronic
trading platform. Lastly, CBOE is attaching an index to Chapters 50-55
to set forth the applicability of other CBOE rules to trading under
Chapters 50-55.
---------------------------------------------------------------------------
\12\ See CBOE Rule 1.1, Interpretations and Policies .02.
\13\ See CBOE Rule 1.1, Interpretations and Policies .03.
---------------------------------------------------------------------------
Conclusion
CBOE believes that the proposed migration of trading of non-option
securities to the STOC System would significantly enhance the trading
of these products on the Exchange. CBOE proposes that Chapters 50-55 be
approved on a pilot basis for a period commencing on the approval date
of this filing and ending on the final compliance date for the Order
Protection Rule of Regulation NMS.\14\ CBOE acknowledges that it will
need to file additional rule changes to comply with Regulation NMS,\15\
and the Exchange commits to submitting such filings in a timely manner.
---------------------------------------------------------------------------
\14\ 17 CFR 242.611.
\15\ See generally Securities Exchange Act Release 51808 (June
9, 2005), 70 FR 37496 (June 29, 2005) (order adopting rules under
Regulation NMS).
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Exchange Act in general and furthers the objectives
of Section 6(b)(5) in particular in that it would enhance the trading
of non-option securities on CBOE and it should promote just and
equitable principles of trade, serve to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change would not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange neither solicited nor received comments with respect
to 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 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, as amended, or
(B) institute proceedings to determine whether the proposed rule
change, as amended, 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, as amended, 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-2004-21 on the subject line.
[[Page 3582]]
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
All submissions should refer to File Number SR-CBOE-2004-21. 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. Copies of
such filings also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should only submit information you
wish to make available publicly. All submissions should refer to File
Number SR-CBOE-2004-21 and should be submitted on or before February
13, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E6-662 Filed 1-20-06; 8:45 am]
BILLING CODE 8010-01-P
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
