Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Regarding Cancellation of the Stock Leg of a Stock-Option Order, 42693-42694 [E6-11980]

Download as PDF Federal Register / Vol. 71, No. 144 / Thursday, July 27, 2006 / Notices rwilkins on PROD1PC63 with NOTICES III. Discussion The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, the requirements of Section 6 of the Act 5 and the rules and regulations thereunder.6 The Commission specifically finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 7 in that it is designed to promote just and equitable principles of trade, to remove impediments and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that the proposal to move to VTC appointments should allow Market-Makers additional flexibility in choosing their appointed classes. The Commission also believes that the proposed amendments to the pilot program that would allow MarketMakers to quote remotely away from CBOE’s trading floor in their appointed Hybrid and Hybrid 2.0 option classes, instead of from outside of his/her appointed trading station, are a reasonable extension of the pilot. The Commission notes that RMMs and eDPMs in an option class would continue to be permitted, on a pilot basis, to have an affiliated Market-Maker in that class. CBOE Rule 8.3(c) would continue to require that the affiliated Market-Maker can submit electronic quotations in any class in which the affiliated e-DPM or RMM has an appointment only if the Market-Maker is present in the trading station where the class is located. The Commission believes that requiring that the Market-Maker affiliated with the eDPM or RMM be present in the trading station where the class is located is reasonable, given the allocation algorithm adopted by the Exchange. The Commission also notes that Market-Makers and affiliated RMMs or e-DPMs would continue to be permitted, on a pilot basis, to operate as multiple aggregation units under the criteria set forth in CBOE Rule 8.4(c)(ii). In addition, the Commission notes that two affiliated Market-Makers would continue to be permitted to hold an appointment in the same class provided both Market-Makers operate as multiple aggregation units under the criteria set forth in CBOE Rule 8.4(c)(ii). However, an affiliated Market-Maker and DPM would not be permitted to hold an appointment in the same class. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,8 that the proposed rule change (SR–CBOE–2006– 51) is approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–11987 Filed 7–26–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54185; File No. SR–CHX– 2005–34] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Regarding Cancellation of the Stock Leg of a Stock-Option Order July 20, 2006. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 14, 2005, the Chicago Stock Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the CHX. On July 11, 2006, the Exchange 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules to permit cancellation of the stock leg of a stock-option order if market conditions in a non-Exchange market prevent the options leg of the order from being executed at the agreed-upon price. The text of the proposed rule change is available on CHX’s Web site (http:// 8 15 5 15 U.S.C. 78f. 6 In approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 7 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 16:46 Jul 26, 2006 Jkt 208001 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 In Amendment No. 1, CHX made minor revisions to the proposed rule text and clarified certain details of its proposal. PO 00000 9 17 Frm 00069 Fmt 4703 Sfmt 4703 42693 www.chx.com), at the CHX’s Office of the Secretary, and at the Commission’s public reference room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the CHX included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose According to the Exchange, stockoption orders are relied on frequently by options market makers as part of their legitimate hedging strategies. The typical stock-option order involves an order to buy or sell a stated number of shares of an underlying security, coupled with the purchase or sale of option contracts, puts or calls on the opposite side of the market from the underlying security. Certain CHX floor participants receive stock-option related order flow from offfloor participants who are options market makers on options exchanges such as the Chicago Board Options Exchange (‘‘CBOE’’). Specifically, the stock leg of a stock-option order is routed to the CHX for execution, while the options leg(s) is executed on an options exchange. The CHX states that, because stockoption orders are complex transactions (often with multiple parties) and markets are volatile, with quotations moving quickly and often, many times the options leg of the transaction does not occur, in which case the off-floor participant requests that the CHX floor participant cancel the transaction’s stock leg. The proposed rule change would permit cancellation of the stock leg of a stock-option order if market conditions in the non-Exchange market prevented the execution of the options leg of a transaction.4 The proposed rule 4 The types of market conditions that would be sufficient to justify cancellation of the Exchange leg of a multi-market order include a sudden change in the price of the options involved in the transaction prior to execution of the trade and a trading halt or systems failure that precludes immediate E:\FR\FM\27JYN1.SGM Continued 27JYN1 42694 Federal Register / Vol. 71, No. 144 / Thursday, July 27, 2006 / Notices is based on (and virtually identical to) CBOE Rule 6.48(b)(ii), which permits cancellation of the options leg of a stock-option order.5 It is important to note that the proposed rule change would require that the CHX floor participant maintain records ‘‘sufficient to establish that market conditions in a non-Exchange market prevented the execution of the option leg(s).’’ The CHX believes this requirement would give the CHX Department of Market Regulation the ability to oversee the cancellation of stock leg orders, to ensure against abusive trade reporting practices.6 2. Statutory Basis The Exchange believes that its proposal, as amended, is consistent with Section 6(b) of the Act 7 in general, and furthers the objectives of Section 6(b)(5) of the Act 8 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest by promoting consistency between the Exchange and options markets relating to cancellation of the components of stock-option orders. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which the CHX 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 should be disapproved. public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR–CHX–2005–34 and should be submitted on or before August 17, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–11980 Filed 7–26–06; 8:45 am] BILLING CODE 8010–01–P IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54159; File No. SR–NASD– 2006–058] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change and Amendment No. 1 Thereto Regarding Pricing for Non-Members Using the Nasdaq Market Center and Nasdaq’s Brut and INET Facilities The Exchange does not believe that the proposed rule change, as amended, would impose any burden on competition. • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CHX–2005–34 on the subject line. execution of the options leg at the agreed upon price. 5 According to CHX, the stock leg of a stockoption order is always presented to the CHX with an identified buyer and seller who have agreed to the terms of the trade. Both buyer and seller are aware of the possibility that the stock leg of a stockoption order may be cancelled on the CHX if the corresponding options leg is cancelled on an options market. The CHX states that, because both the buyer and seller would be identified when the stock leg is presented to the CHX, there would be no possibility that another CHX member’s order could be matched against a stock-option order. Accordingly, the CHX believes that there would be no risk that an investor’s order could be involuntarily cancelled without notice to the investor; the CHX thus believes that this pattern and practice amply satisfies the requirements of proposed Interpretation and Policy .01(d). 6 The recordkeeping requirement would permit the CHX Department of Market Regulation to monitor patterns that may develop, as well as the overall quantity of trade cancellations, to help deter members from simply canceling orders for the sake of convenience. The Exchange believes that the recordkeeping requirement would help ensure that the volume of transactions reported is accurate and complete and not overstated. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 • Send paper comments in triplicate (‘‘Act’’),1 and Rule 19b–4 thereunder,2 to Nancy M. Morris, Secretary, notice is hereby given that on May 1, Securities and Exchange Commission, 2006, the National Association of Station Place, 100 F Street, NE., Securities Dealers, Inc. (‘‘NASD’’), Washington, DC 20549–1090. through its subsidiary, The Nasdaq All submissions should refer to File Stock Market, Inc. (‘‘Nasdaq’’), filed Number SR–CHX–2005–34. This file with the Securities and Exchange number should be included on the Commission (‘‘Commission’’) the subject line if e-mail is used. To help the proposed rule change as described in Commission process and review your Items I and II below, which Items have comments more efficiently, please use been prepared by Nasdaq. On June 12, only one method. The Commission will 2006, Nasdaq filed Amendment No. 1 to post all comments on the Commission’s the proposed rule change.3 The Internet Web site (http://www.sec.gov/ 9 17 CFR 200.30–3(a)(12). rules/sro.shtml). Copies of the 1 15 U.S.C. 78s(b)(1). submission, all subsequent 2 17 CFR 240.19b–4. amendments, all written statements 3 In Amendment No. 1, Nasdaq amended the with respect to the proposed rule description of the proposed rule change to indicate change that are filed with the that when a market participant enters an order into Nasdaq’s Brut or INET systems that is sent to a Commission, and all written Nasdaq Market Center market participant that communications relating to the charges an access fee to Brut or INET, the market proposed rule change between the participant entering the order shall be charged (i) Commission and any person, other than the applicable execution fee of the Nasdaq Facilities, or (ii) in the case of executions against those that may be withheld from the rwilkins on PROD1PC63 with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition VerDate Aug<31>2005 16:46 Jul 26, 2006 Jkt 208001 July 17, 2006. Paper Comments PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 E:\FR\FM\27JYN1.SGM 27JYN1

Agencies

[Federal Register Volume 71, Number 144 (Thursday, July 27, 2006)]
[Notices]
[Pages 42693-42694]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-11980]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54185; File No. SR-CHX-2005-34]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Regarding Cancellation of the Stock Leg of a Stock-Option Order

 July 20, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 14, 2005, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CHX. On July 11, 
2006, the Exchange 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\ In Amendment No. 1, CHX made minor revisions to the proposed 
rule text and clarified certain details of its proposal.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend its rules to permit cancellation of 
the stock leg of a stock-option order if market conditions in a non-
Exchange market prevent the options leg of the order from being 
executed at the agreed-upon price.
    The text of the proposed rule change is available on CHX's Web site 
(http://www.chx.com), at the CHX's Office of the Secretary, and at the 
Commission's public reference room.

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

    In its filing with the Commission, the CHX included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    According to the Exchange, stock-option orders are relied on 
frequently by options market makers as part of their legitimate hedging 
strategies. The typical stock-option order involves an order to buy or 
sell a stated number of shares of an underlying security, coupled with 
the purchase or sale of option contracts, puts or calls on the opposite 
side of the market from the underlying security.
    Certain CHX floor participants receive stock-option related order 
flow from off-floor participants who are options market makers on 
options exchanges such as the Chicago Board Options Exchange 
(``CBOE''). Specifically, the stock leg of a stock-option order is 
routed to the CHX for execution, while the options leg(s) is executed 
on an options exchange.
    The CHX states that, because stock-option orders are complex 
transactions (often with multiple parties) and markets are volatile, 
with quotations moving quickly and often, many times the options leg of 
the transaction does not occur, in which case the off-floor participant 
requests that the CHX floor participant cancel the transaction's stock 
leg. The proposed rule change would permit cancellation of the stock 
leg of a stock-option order if market conditions in the non-Exchange 
market prevented the execution of the options leg of a transaction.\4\ 
The proposed rule

[[Page 42694]]

is based on (and virtually identical to) CBOE Rule 6.48(b)(ii), which 
permits cancellation of the options leg of a stock-option order.\5\
---------------------------------------------------------------------------

    \4\ The types of market conditions that would be sufficient to 
justify cancellation of the Exchange leg of a multi-market order 
include a sudden change in the price of the options involved in the 
transaction prior to execution of the trade and a trading halt or 
systems failure that precludes immediate execution of the options 
leg at the agreed upon price.
    \5\ According to CHX, the stock leg of a stock-option order is 
always presented to the CHX with an identified buyer and seller who 
have agreed to the terms of the trade. Both buyer and seller are 
aware of the possibility that the stock leg of a stock-option order 
may be cancelled on the CHX if the corresponding options leg is 
cancelled on an options market. The CHX states that, because both 
the buyer and seller would be identified when the stock leg is 
presented to the CHX, there would be no possibility that another CHX 
member's order could be matched against a stock-option order. 
Accordingly, the CHX believes that there would be no risk that an 
investor's order could be involuntarily cancelled without notice to 
the investor; the CHX thus believes that this pattern and practice 
amply satisfies the requirements of proposed Interpretation and 
Policy .01(d).
---------------------------------------------------------------------------

    It is important to note that the proposed rule change would require 
that the CHX floor participant maintain records ``sufficient to 
establish that market conditions in a non-Exchange market prevented the 
execution of the option leg(s).'' The CHX believes this requirement 
would give the CHX Department of Market Regulation the ability to 
oversee the cancellation of stock leg orders, to ensure against abusive 
trade reporting practices.\6\
---------------------------------------------------------------------------

    \6\ The recordkeeping requirement would permit the CHX 
Department of Market Regulation to monitor patterns that may 
develop, as well as the overall quantity of trade cancellations, to 
help deter members from simply canceling orders for the sake of 
convenience. The Exchange believes that the recordkeeping 
requirement would help ensure that the volume of transactions 
reported is accurate and complete and not overstated.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal, as amended, is consistent 
with Section 6(b) of the Act \7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \8\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to, and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest by promoting consistency between the 
Exchange and options markets relating to cancellation of the components 
of stock-option orders.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, would impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the CHX 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 should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CHX-2005-34 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2005-34. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make publicly available. All submissions should refer to 
File Number SR-CHX-2005-34 and should be submitted on or before August 
17, 2006.
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-11980 Filed 7-26-06; 8:45 am]
BILLING CODE 8010-01-P