Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding the Exchange's Open Outcry Crossing Rule, 66810-66813 [E6-19381]

Download as PDF 66810 Federal Register / Vol. 71, No. 221 / Thursday, November 16, 2006 / Notices pwalker on PROD1PC61 with NOTICES protection of investors and the public interest. In addition, as required under Rule 19b–4(f)(6)(iii),18 the CBOE provided the Commission with written notice of its intention to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to filing the proposal with the Commission. Therefore, the foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 19 and Rule 19b–4(f)(6) thereunder.20 Pursuant to Rule 19b–4(f)(6)(iii) under the Act, a proposal does not become operative for 30 days after the date of its filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. The CBOE has asked the Commission to waive the 30-day operative delay because the CBOE believes that the proposal is substantially similar to ISE Rule 722 and because the proposal clarifies the applicable reporting increments for the options leg of stock-option and security future-option orders. Accordingly, the CBOE believes that its proposal presents no novel issues and that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because the proposal will allow stockoption orders and security future-option orders, like other types of complex orders, to be executed in penny increments. Allowing stock-option and security future-option orders to be executed in penny increments could facilitate the execution of such orders by increasing the number of price points at which these orders may be executed. For these reasons, the Commission designates that the proposed rule change become operative immediately. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, CFR 240.19b–4(f)(6)(iii). 19 15 U.S.C. 78s(b)(3)(A). 20 17 CFR 240.19b–4(f)(6). 20:27 Nov 15, 2006 Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2006–83 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–CBOE–2006–83. 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 Room. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–CBOE–2006–83 and should be submitted on or before December 7, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.21 Nancy M. Morris, Secretary. [FR Doc. E6–19378 Filed 11–15–06; 8:45 am] BILLING CODE 8011–01–P 18 17 VerDate Aug<31>2005 including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 21 17 Jkt 211001 PO 00000 Fmt 4703 [Release No. 34–54726; File No. SR–CBOE– 2006–89] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding the Exchange’s Open Outcry Crossing Rule November 8, 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 6, 2006, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The CBOE has filed this proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes certain changes that are intended to clarify the operation of CBOE Rule 6.74, which pertains to crossing orders in open outcry. The text of the proposed rule change is available on the Exchange’s Web site (https://www.cboe.com), at the Exchange’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 Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 2 17 CFR 200.30–3(a)(12). Frm 00062 SECURITIES AND EXCHANGE COMMISSION Sfmt 4703 E:\FR\FM\16NON1.SGM 16NON1 Federal Register / Vol. 71, No. 221 / Thursday, November 16, 2006 / Notices 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 pwalker on PROD1PC61 with NOTICES CBOE Rule 6.74, ‘‘Crossing Orders,’’ is an open outcry crossing rule that was adopted prior to the time that the Exchange established its Hybrid Trading System (‘‘Hybrid’’), which, among other things, introduced dynamic electronic quotes and the ability for non-public customer orders to be placed in the electronic book. This proposed rule change therefore seeks to update CBOE Rule 6.74 in certain respects in order to clarify the priority of in-crowd market ` participants (‘‘ICMPs’’) vis-a-vis electronic trading interests. The proposed rule change also seeks to clarify the applicability of Section 11(a)(1) of the Act 5 to crossing transactions conducted pursuant to CBOE Rule 6.74 and to update certain other provisions that have become outdated. First, the Exchange seeks to update the provisions of CBOE Rule 6.74(d), which describes the procedures for crossing orders when a Floor Broker is seeking a participation entitlement, in order to clarify the priority of members in the trading crowd after the applicable participation entitlements have been satisfied. By way of background, in the event a Floor Broker represents an order that is of the eligible order size or greater (‘‘original order’’) and is also holding a facilitation order or a solicited order, the Floor Broker may proceed under the provisions of CBOE Rule 6.74(d) to obtain a crossing participation entitlement.6 The CBOE Rule 6.74(d) crossing participation entitlement permits the Floor Broker to transact either 20% or 40%, as determined by the appropriate Procedure Committee, of the remainder of the original order against the facilitation or solicited order. Further, if a DPM or LMM is granted participation rights under CBOE Rule 8.87 or CBOE Rule 8.15B, respectively, CBOE Rule 6.74(d)(v) provides that the DPM or LMM participation entitlement is applied if the trade occurs at the DPM’s/LMM’s market, provided that the DPM/LMM participation entitlement will be limited to the number of 5 15 U.S.C. 78k(a)(1). to CBOE Rule 6.74(d)(ii), the Floor Broker crossing entitlement takes effect after all public customer orders that were on the limit order book and then represented in the trading crowd at the time the market was established have been satisfied. 6 Pursuant VerDate Aug<31>2005 20:27 Nov 15, 2006 Jkt 211001 contracts that, when combined with the percentage the Floor Broker crossed, does not exceed 40% of the original order size. After the applicable public customer orders and participation entitlements have been satisfied, CBOE Rule 6.74(d)(vi) provides that ‘‘the members of the trading crowd’’ are entitled to participate in the balance remaining in the order.7 The proposed rule change will clarify which members of the trading crowd are entitled to participate in the balance remaining in the order. Specifically, the proposed rule change provides that the remaining balance of an order will be allocated among the ICMPs who established the market. Therefore, neither electronic quotes received by the Exchange from electronic DPMs and Remote Market-Makers (categories of CBOE market-makers that are not physically located in the trading crowd) nor broker-dealer electronic orders resting on the book would be entitled to participate in the remaining balance of the order if there is sufficient interest among the ICMPs in the trading crowd at the same price or better. Thus, the CBOE Rule 6.74(d) priority sequence is generally such that, at the same price, public customer orders resting in the book would have first priority, then the Floor Broker to the extent of the crossing entitlement, then the DPM/LMM (to the extent of the DPM/LMM participation entitlement), and then the ICMPs. Further, nothing prohibits a Floor Broker or DPM/LMM from trading more than his percentage entitlement if the other ICMPs do not choose to trade the remaining portion of the order. To the extent there may be any further remaining balance, samepriced broker-dealer orders resting in the book and electronic quotes of market makers would have priority to trade next. The proposed rule change also clarifies how the remaining balance of the order is allocated among the ICMPs, on which the rule is currently silent. Specifically, the proposed rule change provides that priority to trade the remaining portion of an order being crossed in open outcry shall be afforded to bids (offers) made by ICMPs in the sequence in which they are made. If bids (offers) were made at the same time, or in the event that the sequence 7 CBOE Rule 6.74(d)(vi) currently provides in relevant part that the ‘‘members of the trading crowd who established the market will have priority over all other orders that were not represented in the trading crowd at the time the market was established (but not over customer orders on the book) and will maintain priority over such orders except for orders that improve upon the market.’’ PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 66811 cannot be reasonably determined, priority shall be apportioned equally among the ICMPs who established the market. In the event an ICMP declines to accept any portion of the available contracts, any remaining contracts shall be apportioned equally among the other ICMPs who established the market until all contracts have been apportioned. The proposed rule change also seeks to adopt an introductory paragraph for CBOE Rule 6.74 that generally clarifies the priority principles applicable among ICMPs and electronic trading interest. Specifically, the introduction will provide that, at the same price, bids and offers of ICMPs have first priority, except as is otherwise provided in the Rule with respect to public customer orders resting in the electronic book, and all other bids and offers (including bids and offers of broker-dealers in the electronic book and electronic quotes of Market-Makers) have second priority. All transactions conducted under CBOE Rule 6.74 must be in compliance with Section 11(a) of the Act and the rules promulgated thereunder. Therefore, the introduction will also make clear that, in order to transact proprietary orders 8 on the floor of the Exchange pursuant to the Rule, members must ensure that they qualify for an exemption from Section 11(a)(1) of the Act. Members relying on Section 11(a)(1)(G) of the Act 9 and Rule 11a1– 1(T) thereunder (the ‘‘G’’ exemption) 10 as an exemption must comply with the requirements of that exemption before executing a proprietary order, including the requirement to yield priority to any bid or offer at the same price for the account of a person who is not, or is not associated with, a member (a ‘‘nonmember’’), irrespective of the size of any such bid or offer or the time when it was entered. Because CBOE’s electronic book does not distinguish between member and non-member broker-dealer orders, the introductory language also clarifies how a member relying on the ‘‘G’’ exemption must yield priority. Specifically, before a member that is relying on the ‘‘G’’ exemption can execute a proprietary order, the member must first yield priority to all samepriced public customer orders and broker-dealer orders (whether nonmember or member) resting in the electronic book, as well as any other bids and offers that would otherwise 8 For purposes of the Rule, a ‘‘proprietary order’’ will mean an order for a member’s own account, the account of an associated person, or an account with respect to which the member or an associated person thereof exercises investment discretion. 9 15 U.S.C. 78k(a)(1)(G). 10 17 CFR 240.11a1–1(T). E:\FR\FM\16NON1.SGM 16NON1 pwalker on PROD1PC61 with NOTICES 66812 Federal Register / Vol. 71, No. 221 / Thursday, November 16, 2006 / Notices have priority over those broker-dealer orders under CBOE Rule 6.74. For example, assume a Floor Broker is relying on the ‘‘G’’ exemption and asserting a participation entitlement when attempting to cross an order with a firm proprietary order pursuant to CBOE Rule 6.74(d). The Floor Broker must yield priority to any same-priced public customer orders and brokerdealer orders resting in the electronic book, as well as any DPM/LMM and other ICMPs that would otherwise have priority over those broker-dealer orders. In such a scenario, the CBOE Rule 6.74(d) priority sequence described above is modified so that, at the same price, public customer orders resting in the book would have first priority, then the DPM/LMM (to the extent of the DPM/LMM participation entitlement), then the ICMPs (to the extent each such participant also qualifies for an exemption from Section 11(a)(1) of the Act but is not relying on a ‘‘G’’ exemption), then broker dealer orders resting in the book, and then the Floor Broker’s proprietary order (along with any other ICMPs also relying on the ‘‘G’’ exemption). As in CBOE Rule 6.74(d)(v), the Floor Broker’s percentage entitlement to the remaining contracts, when combined with the DPM/LMM guaranteed participation, may not exceed 40% of the order. However, provided the ‘‘G’’ exemption requirements are satisfied, nothing prohibits a Floor Broker or DPM/LMM from trading more than their applicable percentage entitlement if other ICMPs do not choose to trade the remaining portion of the order. To the extent there may be any further remaining balance, same-priced electronic quotes of market makers would have priority to trade next. Finally, the Exchange proposes various other changes to CBOE Rule 6.74, including conforming changes to reference ‘‘ICMPs’’ throughout the text of the Rule. The Exchange also proposes changes to the text of Interpretation and Policy .08 of the Rule to clarify that CBOE Rule 6.74(d) supercedes the priority provisions of paragraph (d) of CBOE Rule 6.9, ‘‘Solicited Transactions,’’ with respect to both facilitations and solicitations.11 The Exchange also proposes to remove an outdated reference to a ‘‘Board Broker,’’ a term which no longer is utilized by the Exchange. 11 The text of CBOE Rule 6.74, Interpretation and Policy .08 currently refers to ‘‘solicited orders,’’ which are defined in CBOE Rule 6.9, Interpretation and Policy .01 to include both facilitation orders and orders resulting from solicitations. VerDate Aug<31>2005 20:27 Nov 15, 2006 Jkt 211001 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,12 in general, and furthers the objectives of Section 6(b)(5) of the Act,13 in particular, in that it is designed to 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 CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposal. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has designated the proposed rule change as one that: (i) Does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not become operative for 30 days from the date of filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. In addition, as required under Rule 19b–4(f)(6)(iii),14 the CBOE provided the Commission with written notice of its intention to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to filing the proposal with the Commission. Therefore, the foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 15 and Rule 19b–4(f)(6) thereunder.16 Pursuant to Rule 19b–4(f)(6)(iii) under the Act, a proposal does not become operative for 30 days after the date of its filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. The CBOE has requested that the Commission waive the 30-day 12 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 14 17 CFR 240.19b–4(f)(6)(iii). 15 15 U.S.C. 78s(b)(3)(A). 16 17 CFR 240.19b–4(f)(6). 13 15 PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because the proposal will clarify the operation of CBOE Rule 6.74 and will clarify how Floor Brokers may comply with the requirements of Section 11(a) under the Act.17 For these reasons, the Commission designates that the proposed rule change become operative immediately. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2006–89 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549–1090. All submissions should refer to File No. SR–CBOE–2006–89. 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 17 For purposes of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). E:\FR\FM\16NON1.SGM 16NON1 Federal Register / Vol. 71, No. 221 / Thursday, November 16, 2006 / Notices 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 the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–CBOE–2006–89 and should be submitted on or before December 7, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.18 Nancy M. Morris, Secretary. [FR Doc. E6–19381 Filed 11–15–06; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54728; File No. SR–NASD– 2006–114] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt an Automated Process for Opening Quotations of ITS/CAES Market Makers November 8, 2006. pwalker on PROD1PC61 with NOTICES 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 September 29, 2006, the National Association of Securities Dealers, Inc. (‘‘NASD’’), through its subsidiary, The Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by Nasdaq. Nasdaq filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b– 4(f)(6) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 18 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 1 15 VerDate Aug<31>2005 20:27 Nov 15, 2006 Jkt 211001 66813 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Nasdaq proposes to establish an automatic process for opening quotes in non-Nasdaq securities through the ITS/ CAES System. Nasdaq implemented the proposed rule change on October 9, 2006.5 The text of the proposed rule change is available on the Nasdaq’s Web site at https://www.nasdaq.com, at Nasdaq’s Office of the Secretary and at the Commission’s Public Reference Room. displayed at such time as they specify, or if no time is specified, then at 9:25 a.m. Firms choosing the third option will have their quotes displayed at 9:25 a.m. Any quotes generated through this process will be replaced as soon as a market maker submits a quote update. The automated process will ensure that market makers do not inadvertently fail to maintain a two-sided quote at market open. The quotes displayed through this process will not be available for execution until 9:30 a.m. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Nasdaq 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. Nasdaq has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. Nasdaq believes that the proposed rule change is consistent with Section 15A of the Act,7 in general, and furthers the objectives of Section 15A(b)(5) of the Act,8 in particular, in that it is designed to facilitate transactions in securities, to promote just and equitable principles of trade, to enhance competition, and to protect investors and the public interest. The proposed rule change assists ITS/ CAES market makers in maintaining a two-sided quote at market open and replicates functionality currently in use by the Nasdaq Exchange with respect to Nasdaq-listed stocks. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change B. Self-Regulatory Organization’s Statement on Burden on Competition 1. Purpose Nasdaq is proposing to establish a procedure for automated initial display of quotations by ITS/CAES Market Makers. The procedure would be substantially the same as the existing procedure of The NASDAQ Stock Market LLC (the ‘‘Nasdaq Exchange’’) for automated opening quotes by market makers in Nasdaq-listed stocks under Nasdaq Exchange Rule 4704(b). Specifically, the ITS/CAES System will display initial quotes of ITS/CAES Market Makers in one of three ways, at the option of the market maker: (i) At the last price and size (either including or excluding reserve size) entered by the market maker on the preceding trading day; (ii) at a price and size entered by the market maker prior to 9:25 a.m., or (iii) at a system-generated price of $0.01 (bid) and $200,001 (ask) and a size of 100 shares.6 Firms choosing the first two options will have their quotes 5 Telephone conversation between John Yetter, Senior Associate General Counsel, Nasdaq, and Natasha Cowen, Special Counsel, Division of Market Regulation, Commission, on November 7, 2006. 6 Nasdaq notes that the default settings are different for ITS/CAES than for the Nasdaq Exchange to reflect the extremely high share prices of a small number of stocks listed on the New York Stock Exchange. PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 2. Statutory Basis Nasdaq does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Nasdaq has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) Impose any significant burden on competition; and (iii) Become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, it has become effective pursuant to Section 19(b)(3)(A) of the Act 9 and Rule 19b–4(f)(6) thereunder.10 7 15 U.S.C. 78o–3. U.S.C. 78o–3(b)(5). 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b–4(f)(6). 8 15 E:\FR\FM\16NON1.SGM 16NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 221 (Thursday, November 16, 2006)]
[Notices]
[Pages 66810-66813]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-19381]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54726; File No. SR-CBOE-2006-89]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Regarding the Exchange's Open Outcry Crossing Rule

November 8, 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 6, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The CBOE has filed this proposal as a ``non-controversial'' proposed 
rule change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes certain changes that are intended to clarify 
the operation of CBOE Rule 6.74, which pertains to crossing orders in 
open outcry. The text of the proposed rule change is available on the 
Exchange's Web site (https://www.cboe.com), at the Exchange'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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of

[[Page 66811]]

the most significant aspects of such statements.

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

1. Purpose
    CBOE Rule 6.74, ``Crossing Orders,'' is an open outcry crossing 
rule that was adopted prior to the time that the Exchange established 
its Hybrid Trading System (``Hybrid''), which, among other things, 
introduced dynamic electronic quotes and the ability for non-public 
customer orders to be placed in the electronic book. This proposed rule 
change therefore seeks to update CBOE Rule 6.74 in certain respects in 
order to clarify the priority of in-crowd market participants 
(``ICMPs'') vis-[agrave]-vis electronic trading interests. The proposed 
rule change also seeks to clarify the applicability of Section 11(a)(1) 
of the Act \5\ to crossing transactions conducted pursuant to CBOE Rule 
6.74 and to update certain other provisions that have become outdated.
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    \5\ 15 U.S.C. 78k(a)(1).
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    First, the Exchange seeks to update the provisions of CBOE Rule 
6.74(d), which describes the procedures for crossing orders when a 
Floor Broker is seeking a participation entitlement, in order to 
clarify the priority of members in the trading crowd after the 
applicable participation entitlements have been satisfied. By way of 
background, in the event a Floor Broker represents an order that is of 
the eligible order size or greater (``original order'') and is also 
holding a facilitation order or a solicited order, the Floor Broker may 
proceed under the provisions of CBOE Rule 6.74(d) to obtain a crossing 
participation entitlement.\6\ The CBOE Rule 6.74(d) crossing 
participation entitlement permits the Floor Broker to transact either 
20% or 40%, as determined by the appropriate Procedure Committee, of 
the remainder of the original order against the facilitation or 
solicited order. Further, if a DPM or LMM is granted participation 
rights under CBOE Rule 8.87 or CBOE Rule 8.15B, respectively, CBOE Rule 
6.74(d)(v) provides that the DPM or LMM participation entitlement is 
applied if the trade occurs at the DPM's/LMM's market, provided that 
the DPM/LMM participation entitlement will be limited to the number of 
contracts that, when combined with the percentage the Floor Broker 
crossed, does not exceed 40% of the original order size. After the 
applicable public customer orders and participation entitlements have 
been satisfied, CBOE Rule 6.74(d)(vi) provides that ``the members of 
the trading crowd'' are entitled to participate in the balance 
remaining in the order.\7\
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    \6\ Pursuant to CBOE Rule 6.74(d)(ii), the Floor Broker crossing 
entitlement takes effect after all public customer orders that were 
on the limit order book and then represented in the trading crowd at 
the time the market was established have been satisfied.
    \7\ CBOE Rule 6.74(d)(vi) currently provides in relevant part 
that the ``members of the trading crowd who established the market 
will have priority over all other orders that were not represented 
in the trading crowd at the time the market was established (but not 
over customer orders on the book) and will maintain priority over 
such orders except for orders that improve upon the market.''
---------------------------------------------------------------------------

    The proposed rule change will clarify which members of the trading 
crowd are entitled to participate in the balance remaining in the 
order. Specifically, the proposed rule change provides that the 
remaining balance of an order will be allocated among the ICMPs who 
established the market. Therefore, neither electronic quotes received 
by the Exchange from electronic DPMs and Remote Market-Makers 
(categories of CBOE market-makers that are not physically located in 
the trading crowd) nor broker-dealer electronic orders resting on the 
book would be entitled to participate in the remaining balance of the 
order if there is sufficient interest among the ICMPs in the trading 
crowd at the same price or better.
    Thus, the CBOE Rule 6.74(d) priority sequence is generally such 
that, at the same price, public customer orders resting in the book 
would have first priority, then the Floor Broker to the extent of the 
crossing entitlement, then the DPM/LMM (to the extent of the DPM/LMM 
participation entitlement), and then the ICMPs. Further, nothing 
prohibits a Floor Broker or DPM/LMM from trading more than his 
percentage entitlement if the other ICMPs do not choose to trade the 
remaining portion of the order. To the extent there may be any further 
remaining balance, same-priced broker-dealer orders resting in the book 
and electronic quotes of market makers would have priority to trade 
next.
    The proposed rule change also clarifies how the remaining balance 
of the order is allocated among the ICMPs, on which the rule is 
currently silent. Specifically, the proposed rule change provides that 
priority to trade the remaining portion of an order being crossed in 
open outcry shall be afforded to bids (offers) made by ICMPs in the 
sequence in which they are made. If bids (offers) were made at the same 
time, or in the event that the sequence cannot be reasonably 
determined, priority shall be apportioned equally among the ICMPs who 
established the market. In the event an ICMP declines to accept any 
portion of the available contracts, any remaining contracts shall be 
apportioned equally among the other ICMPs who established the market 
until all contracts have been apportioned.
    The proposed rule change also seeks to adopt an introductory 
paragraph for CBOE Rule 6.74 that generally clarifies the priority 
principles applicable among ICMPs and electronic trading interest. 
Specifically, the introduction will provide that, at the same price, 
bids and offers of ICMPs have first priority, except as is otherwise 
provided in the Rule with respect to public customer orders resting in 
the electronic book, and all other bids and offers (including bids and 
offers of broker-dealers in the electronic book and electronic quotes 
of Market-Makers) have second priority.
    All transactions conducted under CBOE Rule 6.74 must be in 
compliance with Section 11(a) of the Act and the rules promulgated 
thereunder. Therefore, the introduction will also make clear that, in 
order to transact proprietary orders \8\ on the floor of the Exchange 
pursuant to the Rule, members must ensure that they qualify for an 
exemption from Section 11(a)(1) of the Act.
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    \8\ For purposes of the Rule, a ``proprietary order'' will mean 
an order for a member's own account, the account of an associated 
person, or an account with respect to which the member or an 
associated person thereof exercises investment discretion.
---------------------------------------------------------------------------

    Members relying on Section 11(a)(1)(G) of the Act \9\ and Rule 
11a1-1(T) thereunder (the ``G'' exemption) \10\ as an exemption must 
comply with the requirements of that exemption before executing a 
proprietary order, including the requirement to yield priority to any 
bid or offer at the same price for the account of a person who is not, 
or is not associated with, a member (a ``non-member''), irrespective of 
the size of any such bid or offer or the time when it was entered. 
Because CBOE's electronic book does not distinguish between member and 
non-member broker-dealer orders, the introductory language also 
clarifies how a member relying on the ``G'' exemption must yield 
priority. Specifically, before a member that is relying on the ``G'' 
exemption can execute a proprietary order, the member must first yield 
priority to all same-priced public customer orders and broker-dealer 
orders (whether non-member or member) resting in the electronic book, 
as well as any other bids and offers that would otherwise

[[Page 66812]]

have priority over those broker-dealer orders under CBOE Rule 6.74.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78k(a)(1)(G).
    \10\ 17 CFR 240.11a1-1(T).
---------------------------------------------------------------------------

    For example, assume a Floor Broker is relying on the ``G'' 
exemption and asserting a participation entitlement when attempting to 
cross an order with a firm proprietary order pursuant to CBOE Rule 
6.74(d). The Floor Broker must yield priority to any same-priced public 
customer orders and broker-dealer orders resting in the electronic 
book, as well as any DPM/LMM and other ICMPs that would otherwise have 
priority over those broker-dealer orders. In such a scenario, the CBOE 
Rule 6.74(d) priority sequence described above is modified so that, at 
the same price, public customer orders resting in the book would have 
first priority, then the DPM/LMM (to the extent of the DPM/LMM 
participation entitlement), then the ICMPs (to the extent each such 
participant also qualifies for an exemption from Section 11(a)(1) of 
the Act but is not relying on a ``G'' exemption), then broker dealer 
orders resting in the book, and then the Floor Broker's proprietary 
order (along with any other ICMPs also relying on the ``G'' exemption). 
As in CBOE Rule 6.74(d)(v), the Floor Broker's percentage entitlement 
to the remaining contracts, when combined with the DPM/LMM guaranteed 
participation, may not exceed 40% of the order. However, provided the 
``G'' exemption requirements are satisfied, nothing prohibits a Floor 
Broker or DPM/LMM from trading more than their applicable percentage 
entitlement if other ICMPs do not choose to trade the remaining portion 
of the order. To the extent there may be any further remaining balance, 
same-priced electronic quotes of market makers would have priority to 
trade next.
    Finally, the Exchange proposes various other changes to CBOE Rule 
6.74, including conforming changes to reference ``ICMPs'' throughout 
the text of the Rule. The Exchange also proposes changes to the text of 
Interpretation and Policy .08 of the Rule to clarify that CBOE Rule 
6.74(d) supercedes the priority provisions of paragraph (d) of CBOE 
Rule 6.9, ``Solicited Transactions,'' with respect to both 
facilitations and solicitations.\11\ The Exchange also proposes to 
remove an outdated reference to a ``Board Broker,'' a term which no 
longer is utilized by the Exchange.
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    \11\ The text of CBOE Rule 6.74, Interpretation and Policy .08 
currently refers to ``solicited orders,'' which are defined in CBOE 
Rule 6.9, Interpretation and Policy .01 to include both facilitation 
orders and orders resulting from solicitations.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\12\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\13\ in particular, in that it 
is designed to 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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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 on the 
proposal.

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

    The Exchange has designated the proposed rule change as one that: 
(i) Does not significantly affect the protection of investors or the 
public interest; (ii) does not impose any significant burden on 
competition; and (iii) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. In 
addition, as required under Rule 19b-4(f)(6)(iii),\14\ the CBOE 
provided the Commission with written notice of its intention to file 
the proposed rule change, along with a brief description and the text 
of the proposed rule change, at least five business days prior to 
filing the proposal with the Commission. Therefore, the foregoing rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act, a proposal does 
not become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest. The CBOE has requested 
that the Commission waive the 30-day operative delay. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because the proposal 
will clarify the operation of CBOE Rule 6.74 and will clarify how Floor 
Brokers may comply with the requirements of Section 11(a) under the 
Act.\17\ For these reasons, the Commission designates that the proposed 
rule change become operative immediately.
---------------------------------------------------------------------------

    \17\ For purposes of waiving the 30-day operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2006-89 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-CBOE-2006-89. 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

[[Page 66813]]

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 the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File No. SR-
CBOE-2006-89 and should be submitted on or before December 7, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-19381 Filed 11-15-06; 8:45 am]
BILLING CODE 8011-01-P

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