Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to Its Non-option Security Trading Rules, 1350-1353 [E7-208]

Download as PDF 1350 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices 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 Section, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the Amex. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Amex–2007–01 and should be submitted on or before February 1, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.20 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–233 Filed 1–10–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55034; File No. SR–CBOE– 2006–112] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to Its Non-option Security Trading Rules cprice-sewell on PROD1PC66 with NOTICES December 29, 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 December 29, 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, II, and III below, which Items have been 20 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange submits this rule change filing to modify its non-option security trading rules. The text of the proposed rule change is available at CBOE, the Commission’s Public Reference Room, and www.cboe.com. 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. 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 In September 2006, the Commission approved Exchange Chapters 50–55 governing the trading of non-option securities on the Exchange.3 Also in September 2006, the Commission approved modifications 4 to the Exchange’s non-option trading rules to conform those rules to aspects of Regulation NMS.5 Thus, the Exchange currently operates a purely electronic stock trading platform that has in place certain rules required by Regulation NMS in order to qualify as a market center with protected quotations. The Exchange now proposes to further modify Chapters 50–55 in connection with the establishment of the CBOE Stock Exchange (‘‘CBSX’’). CBSX would be a facility of the Exchange and serve as the Exchange’s vehicle for trading non-option securities. CBSX would be a separate legal entity (a Delaware Limited Liability Company) owned by the Exchange and several strategic partners (the Exchange owns roughly 3 See Securities Exchange Act Release No. 54422 (September 11, 2006), 71 FR 54537 (September 15, 2006) (approving SR–CBOE–2004–21). 4 See Securities Exchange Act Release No. 54526 (September 27, 2006), 71 FR 58646 (October 4, 2006) (approving SR–CBOE–2006–70). 5 17 CFR 242.600 et seq. PO 00000 Frm 00042 Fmt 4703 Sfmt 4703 half of CBSX). The Exchange has submitted a separate rule filing proposing to establish CBSX as a facility of the Exchange.6 This filing changes certain portions of the Exchange’s nonoption trading rules to fit the market model envisioned for CBSX. These changes are described below. a. Agency Function Under the current rules, DPMs on the system serve as agent for certain orders that must be processed ‘‘manually.’’ More specifically, in the event the Exchange is not the NBBO at the time a marketable order is received and no market-makers on the Exchange step up to match the NBBO price, the order is routed to the DPM for manual handling. As part of this manual handling, the DPM determines whether to provide price improvement for the order or whether to route it to the NBBO market for execution. During this time, and during any time that the order is routed, the DPM acts as agent for the order. The other instance in which DPMs perform an agency function is in the execution of pre-opening orders at the opening price of the primary market for stocks in which the Exchange is not the primary market. The Exchange now proposes to eliminate all agency functions for CBSX DPMs. The Exchange intends for the CBSX system (it’s the same system as the current system—just a new name) to automatically route marketable non-IOC orders to other market centers when CBSX is not the NBBO and no marketmakers have stepped up to match the NBBO. This routing logic is contained in the CBSX trade engine, and CBSX would use an unaffiliated routing broker pursuant to an agreement to transmit orders on CBSX’s behalf to better-priced protected quotations consistent with Regulation NMS. The handling and routing would all be done electronically by the CBSX system without any manual intervention. As far as the opening, the Exchange proposes to eliminate a DPM’s agency obligation to manually execute orders in connection with the opening print on the primary market by changing the time in which CBSX will open. CBSX would enter an open state at 8:15 a.m. Chicago time (before the primary market openings). The opening would be automatically performed by the system. That is, the CBSX system would automatically execute pre-opening orders at a price that allows the greatest number of preopening shares to trade. This would allow customers that are interested in an 6 See SR–CBOE–2006–110 (filed December 26, 2006). E:\FR\FM\11JAN1.SGM 11JAN1 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices opening execution on CBSX to obtain one without CBSX needing to obligate DPMs to guarantee the opening price on the primary market. cprice-sewell on PROD1PC66 with NOTICES b. CBSX Floor Post The current stock trading system is purely electronic. CBSX also would be purely electronic in that all trades on CBSX must be effected electronically; however, CBSX would utilize a space on the Exchange’s trading floor for price discovery purposes (the ‘‘CBSX Floor Post’’). CBSX DPMs will be required to staff the CBSX Floor Post and respond to price discovery inquiries from brokers. All orders entered at the CBSX Floor Post would be handled and executed in the exact same manner as orders entered from any other location. The CBSX Floor Post would be located near the Exchange’s index options pits in a location that is generally isolated from the equity options trading posts. The Exchange is hopeful that the CBSX Floor Post would be a valuable resource for CBOE floor brokers to inquire about depth of liquidity on CBSX (e.g., CBOE brokers often represent complex orders that contain a stock component and could seek to execute the stock component on CBSX). c. Order Types The Exchange also proposes to adopt several new order types in connection with the CBSX launch. Specifically, CBSX would offer Reserve Orders, Middle Market Cross Orders, Cross Only Orders, and Cross and Sweep Orders. A Reserve Order is a limit order in which the order originator designates a portion of the order for display and dissemination (the ‘‘display amount’’) and designates a portion of the order in ‘‘reserve.’’ A reserve portion is not displayed but is available for execution against incoming orders. Reserve Orders would be last in priority (except that most contingency orders are behind Reserve Orders in priority). Between Reserve Orders at the same price, priority would be afforded utilizing the matching algorithm in effect for the stock. If, after an execution against a Reserve Order, a quantity remains on the Reserve Order, the quote would be refreshed to disseminate the display amount while any remaining balance would be retained in reserve. A Middle Market Cross Order is an order submitted to trade at the midpoint of the NBBO. It must always be submitted with a contra order for the same size and could be entered only when the bid price for the stock is $1 or greater. Further, these orders could be executed in increments as small as 1⁄2 the minimum quoting increment VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 established under CBSX rules. If a Middle Market Cross Order is submitted after CBSX is open but before other markets are open (e.g., 8:20 a.m. Chicago time) the order would execute at the midpoint of the best bid and offer among market centers that are open and disseminating quotes (or just the CBSX midpoint if CBSX were the only market center open). A member would be prohibited from entering a Middle Market Cross Order as principal buyer (seller) if the NBBO spread is one cent wide and that member was an agent for any customer order resting at the prevailing NBBO bid (offer). This provision is meant to preclude a member from trading as principal at a price that is less than one cent better than a price expressed by a customer of that member to which the member has a fiduciary obligation. A Cross Only Order is an order that may only be executed against another Cross Only Order for the same size and price. These orders could be entered only at or between the NBBO, and when entered at the CBSX BBO, only when the terms of the orders meet the crossing parameters set forth in proposed CBSX Rule 52.11 relating to priority for crosses at the CBSX’s disseminated market price. A Cross and Sweep Order is an order that is priced outside of the NBBO and/ or the BBO where the applicable side of the CBSX Book is satisfied by the Cross and Sweep Order and any disseminated better priced protected quotations at away market centers are swept with ISOs by the CBSX System. Any remaining balance on a partially executed Cross and Sweep Order would be cancelled by the CBSX System. CBOE also proposes to modify the manner in which Stop Orders (including Stop Limit Orders) are handled. Current rules provide that a stop buy (sell) order is elected when the stock trades or is bid (offered) at or above (below) the stop price. As proposed, CBSX would handle stop orders so that a stop buy (sell) order is elected only when the stock trades at or above (below) the stop price on the primary market for the stock. The change is consistent with the desires of CBSX customers. d. Order Routing Rule 52.6 (Processing of Round-Lot Orders) is being modified to add additional descriptive language regarding transmission of ISOs to other market centers on behalf of marketable orders received by CBSX. This language compliments language already in place regarding ISO routing in Rule 52.7. PO 00000 Frm 00043 Fmt 4703 Sfmt 4703 1351 e. Odd Lots CBSX would process odd lots differently than provided for under current rules. More specifically, CBSX proposes to execute odd lots at the best price being quoted by CBSX MarketMakers at the time of receipt. A limit odd-lot order would execute only once it became marketable against a CBSX Market-Maker quote/order. Further, the odd-lot portion of a mixed lot would execute as described above while the round-lot portion of the mixed lot would execute as if it were received by the system as a round lot. f. Market-Makers CBSX Market-Makers will function in a manner similar to what is provided by the current rules with a few changes. First, because CBSX would have a location on the Exchange trading floor for price discovery, CBSX DPMs (LMMs) would be required to maintain staffing at that post in order to handle price discovery inquiries. CBSX Remote Market-Makers, however, would be expected to operate in a remote capacity (thus the name Remote Market-Maker). Second, CBSX anticipates adopting a fee structure that would contemplate discounted fees for CBSX MarketMakers that meet certain competitive quoting thresholds. These parameters would be set forth in a separate rule filing. In connection with these parameters, CBOE proposes to adopt a provision in Rule 53.55 stating that routine failure to qualify for the thresholds set forth in the fee incentive program could subject a CBSX DPM to remedial action by CBSX under that rule. Lastly, CBOE has submitted as separate rule filings changes to Rules 53.53 and 53.54 to allow CBSX to allocate securities to anticipated CBSX DPMs in advance of the launch of the CBSX platform.7 g. Section 11(a) Section 11(a) of the Act 8 prohibits a member of a national securities exchange from effecting transactions on that exchange for his own account, the account of an associated person, or an account over which he or his associated persons exercise investment discretion (collectively, the ‘‘covered accounts’’) unless an exception applies. Congress intended Section 11(a) to address concerns about special time and place advantages that floor-based members of 7 See Securities Exchange Act Releases No. 54792 (November 20, 2006), 71 FR 68659 (November 27, 2006), and 54831 (November 29, 2006), 71 FR 70814 (December 6, 2006). 8 15 U.S.C. 78k(a). E:\FR\FM\11JAN1.SGM 11JAN1 1352 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices an exchange might have over persons who were not on the floor—such as the ability to ‘‘execute decisions faster than public investors.’’ 9 Rule 11a2–2(T) under the Act 10 provides exchange members with an exception to the trading prohibition.11 The Exchange believes that most orders entered into CBSX would qualify for Rule 11a2–2(T) for the same reasons that orders submitted to all-electronic exchanges typically qualify for Rule 11a2–2(T)—namely, because as an electronic marketplace where all orders must be entered into the system for execution and handling, there really is no ‘‘floor.’’ However, to the extent members seeking to electronically enter orders while positioned at the CBSX Floor Post might not qualify under Rule 11a2–2(T), the Exchange believes that such members will, by default, qualify for the exemption contained in paragraph (g) of Section 11(a), which exemption essentially provides that members must yield priority to all nonmembers. Orders entered at the CBSX Floor Post based on price discovery discussions with the CBSX DPM would certainly be entered as cross orders. The Exchange believes that all of the CBSX cross-order types would be consistent with the notion of yielding to existing interest at the crossing price. As described above, Middle Market Cross Orders are priced where there is no existing interest and therefore no interest to yield to. Cross Only orders would cancel if any interest in the system could trade with any part of the cross transaction, and Cross and Sweep Orders would satisfy all interest at the cross price prior to effecting the cross trade. cprice-sewell on PROD1PC66 with NOTICES 9 See Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (‘‘1978 Release I’’); Securities Exchange Act Release No. 14713 (April 27, 1978), 43 FR 18557, 18588 (May 1, 1978) (‘‘1978 Release II’’); Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084, 6092 (January 31, 1979) (‘‘1979 Release’’). The 1978 and 1979 Releases cite the House Report at 54–57. 10 17 CFR 240.11a2–2(T). 11 Known as the ‘‘effect versus execute’’ rule, Rule 11a2–2(T) permits an exchange member, subject to certain conditions, to effect a transaction for a covered account by arranging for an unaffiliated member to execute the transaction on the exchange floor. To comply with the rule’s conditions, a member: (1) Must transmit the order from off the exchange floor; (2) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; (3) may not be affiliated with the executing member; and (4) with respect to an account over which the member has investment discretion, neither the member nor his associated person may retain any compensation in connection with effecting the transaction without express written consent from the person authorized to transact business for the account in accordance with the rule. VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 The Exchange notes that a feature contained in proposed Rule 52.11 that would allow a qualifying cross transaction to establish priority over existing bids/offers on the CBSX Book would not be enabled until functionality is developed that would allow the member a choice as to whether to apply the priority feature of Rule 52.11 in connection with any of the CBSX crossorder types.12 Once that choice is in place, a member seeking to qualify under paragraph (g) of Rule 11a2–2(T) could effect a cross without the priority feature of Rule 52.11 and a member that is exempt from Section 11(a) for reasons other than paragraph (g) could effect a cross with the priority feature of Rule 52.11. h. ITS All rules regarding the Intermarket Trading System are being deleted as the Exchange anticipates using private linkages under the CBSX platform and because the ITS Plan will terminate at the commencement of the compliance date for Regulation NMS in February 2007. i. Elimination of Unnecessary Rules Certain existing rules are being eliminated because the Exchange does not believe that they are necessary or relevant to the operation and regulation of the CBSX platform. Paragraph (a) of Rule 52.5 is being eliminated because it merely describes order maintenance functionality available to users and that sort of descriptive language is not normally contained in exchange rules. Paragraph (b) of Rule 52.5 is being eliminated because the Exchange does not want to prohibit market participants from resting buy and sell orders simultaneously in the same security. Rule 53.3(a)(2) is being eliminated because the Exchange does not believe it is necessary to limit a member’s ability to fill a customer order only pursuant to the CBSX crossing rule (Rule 52.11). Rule 53.7 is being eliminated because the Exchange does not contemplate trading SuperShares at this time. Rule 53.52 is being eliminated because CBSX would not utilize (and does not need) the concept of individual DPM Designees (DPM firms are the recognized traders). Finally, Rule 53.70 is being eliminated because CBSX 12 Rule 52.11 provides that a CBSX Trader that wishes to cross two original orders or to facilitate an original order at the established bid or offer irrespective of existing interest at such bid/offer may do so provided the cross transaction: (1) Is for at least 5,000 shares; (2) is for a principal amount of at least $100,000; and (3) is greater in size than any single public customer order resting on the CBSX Book at the proposed cross price. PO 00000 Frm 00044 Fmt 4703 Sfmt 4703 would not utilize (and does not need) the concept of Clearing Firm Brokers. j. Inserting ‘‘CBSX’’ The proposed rule change replaces all references to the ‘‘STOC’’ system or platform with ‘‘CBSX’’ and also replaces references to various Exchange committees with ‘‘CBSX.’’ k. Conclusion In conclusion, the Exchange believes that CBSX would provide a fast and competitive stock trading platform that would be attractive to customers. The Exchange anticipates launching CBSX concurrent with the start of the compliance date for Regulation NMS. Accordingly, the Exchange requests that the proposed rule change not take effect or become operative until February 5, 2007. The Exchange notes that existing Chapters 50–55 are approved as a pilot which terminates in connection with the compliance dates for Regulation NMS. The Exchange hopes approval of these rule changes would allow a seamless migration to CBSX at that time. 2. Statutory Basis CBOE believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, the requirements of Section 6(b) of the Act.13 Specifically, the Exchange believes the proposed rule change is consistent with the requirements of Section 6(b)(5) 14 that the rules of an exchange be designed to promote just and equitable principles of trade, and to protect investors and the public interest. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange believes that this 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 No written comments were solicited or received 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) 13 15 14 15 E:\FR\FM\11JAN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 11JAN1 Federal Register / Vol. 72, No. 7 / Thursday, January 11, 2007 / Notices 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 Exchange consents, the Commission will: (A) by order approve the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: cprice-sewell on PROD1PC66 with NOTICES Electronic Comments • 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–CBOE–2006–112 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 Number SR–CBOE–2006–112. 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 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 VerDate Aug<31>2005 15:52 Jan 10, 2007 Jkt 211001 Number SR–CBOE–2006–112 and should be submitted on or before February 1, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–208 Filed 1–10–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55038; File No. SR–NASD– 2005–079] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 4 to Revise Rule 10322 of the NASD Code of Arbitration Procedure Pertaining to Subpoenas and the Power to Direct Appearances January 3, 2007. I. Introduction On June 17, 2005, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to revise Rule 10322 of the NASD Code of Arbitration Procedure (the ‘‘Code’’), which pertains to subpoenas and the power to direct appearances. On July 13, 2005, the Commission published for comment the proposed rule change in the Federal Register.3 The Commission received twelve comments on the proposal.4 On 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 51981 (July 6, 2005), 70 FR 40411 (July 13, 2005). 4 Comment letters were submitted by Richard Skora, dated July 12, 2005; Seth E. Lipner, Deutsch & Lipner, dated July 13, 2005; Steve Buchwalter, Law Offices of Steve A. Buchwalter, P.C., dated July 13, 2005; Steven B. Caruso, Maddox Hargett & Caruso, P.C., dated July 19, 2005; Dennis M. Pape, dated July 20, 2005; Al Van Kampen, Rohde & Van Kampen PLLC, dated July 25, 2005; Phil Cutler, Cutler Nylander & Hayton, dated August 1, 2005; Avery B. Goodman, A.B. Goodman Law Firm, Ltd., dated August 1, 2005 and August 2, 2005; Jill Gross, Director, Barbara Black, Director, and Richard Downey, Student Intern, Pace Investor Rights Project, dated August 2, 2005; Tim Canning, dated August 3, 2005; and Rosemary J. Shockman, President, Public Investors Arbitration Bar Association, dated August 4, 2005. 1 15 PO 00000 Frm 00045 Fmt 4703 Sfmt 4703 1353 March 29, 2006, May 12, 2006, and July 7, 2006, NASD submitted Amendment Nos. 1, 2, and 3, respectively, to the proposed rule change. The Commission published the proposed rule change, as amended, for comment in the Federal Register on July 18, 2006.5 The Commission received twenty-six comment letters on the proposal, as amended.6 On November 30, 2006, NASD submitted Amendment No. 4 to the proposed rule change.7 This notice and order solicits comments from interested persons on Amendment No. 4 and approves the proposal, as amended, on an accelerated basis. The text of the proposed rule change is available at www.nasd.com, at the principal offices of NASD, and at the Commission’s Public Reference Room. 5 See Securities Exchange Act Release No. 54134 (July 12, 2006), 71 FR 40762 (July 18, 2006). 6 Comment letters were submitted by Gary M. Berne, Stoll Stoll Berne Lokting & Shlachter P.C., dated April 13, 2006 (‘‘Berne’’); Robert S. Banks, Jr., President, Public Investors Arbitration Bar Association, dated April 28, 2006 (‘‘PIABA 1’’); Bryan Lantagne, Chair, Broker-Dealer Arbitration Project Group, North American Securities Administrators Association, Inc., dated May 1, 2006 (‘‘NASAA’’); Martin L. Feinberg, dated May 5, 2006 (‘‘Feinberg 1’’); Seth E. Lipner, Deutsch Lipner, dated July 17, 2006 (‘‘Lipner 1’’); Philip M. Aidikoff, Aidikoff, Uhl & Bakhtiari, dated July 19, 2006 (‘‘Aidikoff’’); Martin L. Feinberg, dated July 19, 2006 (‘‘Feinberg 2’’); Thomas C. Wagner, VanDeusen & Wagner LLC, dated July 19, 2006 (‘‘Wagner 1’’); Steven B. Caruso, Maddox Hargett Caruso, P.C., dated July 21, 2006 (‘‘Caruso’’); Joseph C. Korsak, dated July 21, 2006 (‘‘Korsak’’); Herbert E. Pounds, Jr., dated July 21, 2006 (‘‘Pounds’’); John Miller, dated July 21, 2006 (‘‘Miller’’); Richard M. Layne, Layne Lewis LLP, dated July 21, 2006 (‘‘Layne’’); Sarah G. Anderson, dated July 21, 2006 (‘‘Anderson’’); Jay Salamon, dated July 21, 2006 (‘‘Salamon’’); Steph D. M [sic], dated July 21, 2006 (‘‘Steph M’’); Thomas C. Wagner, VanDeusen Wagner LLC, dated July 21, 2006 (‘‘Wagner 2’’); W. Scott Greco, Greco & Greco, P.C., dated July 21, 2006 (‘‘Greco’’); Carl J. Carlson, Carlson & Dennett, P.S., dated July 24, 2006 (‘‘Carlson’’); Laurence S. Schultz, Driggers, Schultz & Herbst, P.C., dated July 28, 2006 (‘‘Schultz’’); Ryan P. Smith, Vice President, Wachovia Securities, dated August 7, 2006 (‘‘Wachovia’’); Robert S. Banks, Jr., President, Public Investors Arbitration Bar Association, dated August 14, 2006 (‘‘PIABA 2’’); Jim Parker, Johnson, Rial & Parker, P.C., dated September 7, 2006 (‘‘Parker’’); Alan S. Brodherson, Law Offices of Alan S. Brodherson, dated November 20, 2006 (‘‘Brodherson’’); Seth E. Lipner, Deutsch Lipner, dated December 6, 2006 (‘‘Lipner 2’’); and Steven B. Caruso, President, Public Investors Arbitration Bar Association, dated December 7, 2006 (‘‘PIABA 3’’). 7 The PIABA 3 and Lipner 2 letters were received by the Commission after the submission of Amendment No. 4 by NASD. Both commenters noted NASD’s submission of Amendment No. 4 and recommended expedited approval of the proposal, with one commenter stating ‘‘the proposed revisions will both protect public investors and represent a significant step toward reducing the discovery abuses that permeate the arbitration process.’’ (PIABA 3). E:\FR\FM\11JAN1.SGM 11JAN1

Agencies

[Federal Register Volume 72, Number 7 (Thursday, January 11, 2007)]
[Notices]
[Pages 1350-1353]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-208]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55034; File No. SR-CBOE-2006-112]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to Its 
Non-option Security Trading Rules

December 29, 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 December 29, 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, II, and III below, which Items have been substantially 
prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange submits this rule change filing to modify its non-
option security trading rules. The text of the proposed rule change is 
available at CBOE, the Commission's Public Reference Room, and 
www.cboe.com.

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. 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
    In September 2006, the Commission approved Exchange Chapters 50-55 
governing the trading of non-option securities on the Exchange.\3\ Also 
in September 2006, the Commission approved modifications \4\ to the 
Exchange's non-option trading rules to conform those rules to aspects 
of Regulation NMS.\5\ Thus, the Exchange currently operates a purely 
electronic stock trading platform that has in place certain rules 
required by Regulation NMS in order to qualify as a market center with 
protected quotations. The Exchange now proposes to further modify 
Chapters 50-55 in connection with the establishment of the CBOE Stock 
Exchange (``CBSX''). CBSX would be a facility of the Exchange and serve 
as the Exchange's vehicle for trading non-option securities. CBSX would 
be a separate legal entity (a Delaware Limited Liability Company) owned 
by the Exchange and several strategic partners (the Exchange owns 
roughly half of CBSX). The Exchange has submitted a separate rule 
filing proposing to establish CBSX as a facility of the Exchange.\6\ 
This filing changes certain portions of the Exchange's non-option 
trading rules to fit the market model envisioned for CBSX. These 
changes are described below.
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    \3\ See Securities Exchange Act Release No. 54422 (September 11, 
2006), 71 FR 54537 (September 15, 2006) (approving SR-CBOE-2004-21).
    \4\ See Securities Exchange Act Release No. 54526 (September 27, 
2006), 71 FR 58646 (October 4, 2006) (approving SR-CBOE-2006-70).
    \5\ 17 CFR 242.600 et seq.
    \6\ See SR-CBOE-2006-110 (filed December 26, 2006).
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a. Agency Function
    Under the current rules, DPMs on the system serve as agent for 
certain orders that must be processed ``manually.'' More specifically, 
in the event the Exchange is not the NBBO at the time a marketable 
order is received and no market-makers on the Exchange step up to match 
the NBBO price, the order is routed to the DPM for manual handling. As 
part of this manual handling, the DPM determines whether to provide 
price improvement for the order or whether to route it to the NBBO 
market for execution. During this time, and during any time that the 
order is routed, the DPM acts as agent for the order. The other 
instance in which DPMs perform an agency function is in the execution 
of pre-opening orders at the opening price of the primary market for 
stocks in which the Exchange is not the primary market. The Exchange 
now proposes to eliminate all agency functions for CBSX DPMs.
    The Exchange intends for the CBSX system (it's the same system as 
the current system--just a new name) to automatically route marketable 
non-IOC orders to other market centers when CBSX is not the NBBO and no 
market-makers have stepped up to match the NBBO. This routing logic is 
contained in the CBSX trade engine, and CBSX would use an unaffiliated 
routing broker pursuant to an agreement to transmit orders on CBSX's 
behalf to better-priced protected quotations consistent with Regulation 
NMS. The handling and routing would all be done electronically by the 
CBSX system without any manual intervention. As far as the opening, the 
Exchange proposes to eliminate a DPM's agency obligation to manually 
execute orders in connection with the opening print on the primary 
market by changing the time in which CBSX will open. CBSX would enter 
an open state at 8:15 a.m. Chicago time (before the primary market 
openings). The opening would be automatically performed by the system. 
That is, the CBSX system would automatically execute pre-opening orders 
at a price that allows the greatest number of pre-opening shares to 
trade. This would allow customers that are interested in an

[[Page 1351]]

opening execution on CBSX to obtain one without CBSX needing to 
obligate DPMs to guarantee the opening price on the primary market.
b. CBSX Floor Post
    The current stock trading system is purely electronic. CBSX also 
would be purely electronic in that all trades on CBSX must be effected 
electronically; however, CBSX would utilize a space on the Exchange's 
trading floor for price discovery purposes (the ``CBSX Floor Post''). 
CBSX DPMs will be required to staff the CBSX Floor Post and respond to 
price discovery inquiries from brokers. All orders entered at the CBSX 
Floor Post would be handled and executed in the exact same manner as 
orders entered from any other location. The CBSX Floor Post would be 
located near the Exchange's index options pits in a location that is 
generally isolated from the equity options trading posts. The Exchange 
is hopeful that the CBSX Floor Post would be a valuable resource for 
CBOE floor brokers to inquire about depth of liquidity on CBSX (e.g., 
CBOE brokers often represent complex orders that contain a stock 
component and could seek to execute the stock component on CBSX).
c. Order Types
    The Exchange also proposes to adopt several new order types in 
connection with the CBSX launch. Specifically, CBSX would offer Reserve 
Orders, Middle Market Cross Orders, Cross Only Orders, and Cross and 
Sweep Orders.
    A Reserve Order is a limit order in which the order originator 
designates a portion of the order for display and dissemination (the 
``display amount'') and designates a portion of the order in 
``reserve.'' A reserve portion is not displayed but is available for 
execution against incoming orders. Reserve Orders would be last in 
priority (except that most contingency orders are behind Reserve Orders 
in priority). Between Reserve Orders at the same price, priority would 
be afforded utilizing the matching algorithm in effect for the stock. 
If, after an execution against a Reserve Order, a quantity remains on 
the Reserve Order, the quote would be refreshed to disseminate the 
display amount while any remaining balance would be retained in 
reserve.
    A Middle Market Cross Order is an order submitted to trade at the 
midpoint of the NBBO. It must always be submitted with a contra order 
for the same size and could be entered only when the bid price for the 
stock is $1 or greater. Further, these orders could be executed in 
increments as small as \1/2\ the minimum quoting increment established 
under CBSX rules. If a Middle Market Cross Order is submitted after 
CBSX is open but before other markets are open (e.g., 8:20 a.m. Chicago 
time) the order would execute at the midpoint of the best bid and offer 
among market centers that are open and disseminating quotes (or just 
the CBSX midpoint if CBSX were the only market center open). A member 
would be prohibited from entering a Middle Market Cross Order as 
principal buyer (seller) if the NBBO spread is one cent wide and that 
member was an agent for any customer order resting at the prevailing 
NBBO bid (offer). This provision is meant to preclude a member from 
trading as principal at a price that is less than one cent better than 
a price expressed by a customer of that member to which the member has 
a fiduciary obligation.
    A Cross Only Order is an order that may only be executed against 
another Cross Only Order for the same size and price. These orders 
could be entered only at or between the NBBO, and when entered at the 
CBSX BBO, only when the terms of the orders meet the crossing 
parameters set forth in proposed CBSX Rule 52.11 relating to priority 
for crosses at the CBSX's disseminated market price.
    A Cross and Sweep Order is an order that is priced outside of the 
NBBO and/or the BBO where the applicable side of the CBSX Book is 
satisfied by the Cross and Sweep Order and any disseminated better 
priced protected quotations at away market centers are swept with ISOs 
by the CBSX System. Any remaining balance on a partially executed Cross 
and Sweep Order would be cancelled by the CBSX System.
    CBOE also proposes to modify the manner in which Stop Orders 
(including Stop Limit Orders) are handled. Current rules provide that a 
stop buy (sell) order is elected when the stock trades or is bid 
(offered) at or above (below) the stop price. As proposed, CBSX would 
handle stop orders so that a stop buy (sell) order is elected only when 
the stock trades at or above (below) the stop price on the primary 
market for the stock. The change is consistent with the desires of CBSX 
customers.
d. Order Routing
    Rule 52.6 (Processing of Round-Lot Orders) is being modified to add 
additional descriptive language regarding transmission of ISOs to other 
market centers on behalf of marketable orders received by CBSX. This 
language compliments language already in place regarding ISO routing in 
Rule 52.7.
e. Odd Lots
    CBSX would process odd lots differently than provided for under 
current rules. More specifically, CBSX proposes to execute odd lots at 
the best price being quoted by CBSX Market-Makers at the time of 
receipt. A limit odd-lot order would execute only once it became 
marketable against a CBSX Market-Maker quote/order. Further, the odd-
lot portion of a mixed lot would execute as described above while the 
round-lot portion of the mixed lot would execute as if it were received 
by the system as a round lot.
f. Market-Makers
    CBSX Market-Makers will function in a manner similar to what is 
provided by the current rules with a few changes. First, because CBSX 
would have a location on the Exchange trading floor for price 
discovery, CBSX DPMs (LMMs) would be required to maintain staffing at 
that post in order to handle price discovery inquiries. CBSX Remote 
Market-Makers, however, would be expected to operate in a remote 
capacity (thus the name Remote Market-Maker).
    Second, CBSX anticipates adopting a fee structure that would 
contemplate discounted fees for CBSX Market-Makers that meet certain 
competitive quoting thresholds. These parameters would be set forth in 
a separate rule filing. In connection with these parameters, CBOE 
proposes to adopt a provision in Rule 53.55 stating that routine 
failure to qualify for the thresholds set forth in the fee incentive 
program could subject a CBSX DPM to remedial action by CBSX under that 
rule.
    Lastly, CBOE has submitted as separate rule filings changes to 
Rules 53.53 and 53.54 to allow CBSX to allocate securities to 
anticipated CBSX DPMs in advance of the launch of the CBSX platform.\7\
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    \7\ See Securities Exchange Act Releases No. 54792 (November 20, 
2006), 71 FR 68659 (November 27, 2006), and 54831 (November 29, 
2006), 71 FR 70814 (December 6, 2006).
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g. Section 11(a)
    Section 11(a) of the Act \8\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
his own account, the account of an associated person, or an account 
over which he or his associated persons exercise investment discretion 
(collectively, the ``covered accounts'') unless an exception applies. 
Congress intended Section 11(a) to address concerns about special time 
and place advantages that floor-based members of

[[Page 1352]]

an exchange might have over persons who were not on the floor--such as 
the ability to ``execute decisions faster than public investors.'' \9\ 
Rule 11a2-2(T) under the Act \10\ provides exchange members with an 
exception to the trading prohibition.\11\
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    \8\ 15 U.S.C. 78k(a).
    \9\ See Securities Exchange Act Release No. 14563 (March 14, 
1978), 43 FR 11542 (March 17, 1978) (``1978 Release I''); Securities 
Exchange Act Release No. 14713 (April 27, 1978), 43 FR 18557, 18588 
(May 1, 1978) (``1978 Release II''); Securities Exchange Act Release 
No. 15533 (January 29, 1979), 44 FR 6084, 6092 (January 31, 1979) 
(``1979 Release''). The 1978 and 1979 Releases cite the House Report 
at 54-57.
    \10\ 17 CFR 240.11a2-2(T).
    \11\ Known as the ``effect versus execute'' rule, Rule 11a2-2(T) 
permits an exchange member, subject to certain conditions, to effect 
a transaction for a covered account by arranging for an unaffiliated 
member to execute the transaction on the exchange floor. To comply 
with the rule's conditions, a member: (1) Must transmit the order 
from off the exchange floor; (2) may not participate in the 
execution of the transaction once it has been transmitted to the 
member performing the execution; (3) may not be affiliated with the 
executing member; and (4) with respect to an account over which the 
member has investment discretion, neither the member nor his 
associated person may retain any compensation in connection with 
effecting the transaction without express written consent from the 
person authorized to transact business for the account in accordance 
with the rule.
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    The Exchange believes that most orders entered into CBSX would 
qualify for Rule 11a2-2(T) for the same reasons that orders submitted 
to all-electronic exchanges typically qualify for Rule 11a2-2(T)--
namely, because as an electronic marketplace where all orders must be 
entered into the system for execution and handling, there really is no 
``floor.'' However, to the extent members seeking to electronically 
enter orders while positioned at the CBSX Floor Post might not qualify 
under Rule 11a2-2(T), the Exchange believes that such members will, by 
default, qualify for the exemption contained in paragraph (g) of 
Section 11(a), which exemption essentially provides that members must 
yield priority to all non-members. Orders entered at the CBSX Floor 
Post based on price discovery discussions with the CBSX DPM would 
certainly be entered as cross orders. The Exchange believes that all of 
the CBSX cross-order types would be consistent with the notion of 
yielding to existing interest at the crossing price. As described 
above, Middle Market Cross Orders are priced where there is no existing 
interest and therefore no interest to yield to. Cross Only orders would 
cancel if any interest in the system could trade with any part of the 
cross transaction, and Cross and Sweep Orders would satisfy all 
interest at the cross price prior to effecting the cross trade.
    The Exchange notes that a feature contained in proposed Rule 52.11 
that would allow a qualifying cross transaction to establish priority 
over existing bids/offers on the CBSX Book would not be enabled until 
functionality is developed that would allow the member a choice as to 
whether to apply the priority feature of Rule 52.11 in connection with 
any of the CBSX cross-order types.\12\ Once that choice is in place, a 
member seeking to qualify under paragraph (g) of Rule 11a2-2(T) could 
effect a cross without the priority feature of Rule 52.11 and a member 
that is exempt from Section 11(a) for reasons other than paragraph (g) 
could effect a cross with the priority feature of Rule 52.11.
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    \12\ Rule 52.11 provides that a CBSX Trader that wishes to cross 
two original orders or to facilitate an original order at the 
established bid or offer irrespective of existing interest at such 
bid/offer may do so provided the cross transaction: (1) Is for at 
least 5,000 shares; (2) is for a principal amount of at least 
$100,000; and (3) is greater in size than any single public customer 
order resting on the CBSX Book at the proposed cross price.
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h. ITS
    All rules regarding the Intermarket Trading System are being 
deleted as the Exchange anticipates using private linkages under the 
CBSX platform and because the ITS Plan will terminate at the 
commencement of the compliance date for Regulation NMS in February 
2007.
i. Elimination of Unnecessary Rules
    Certain existing rules are being eliminated because the Exchange 
does not believe that they are necessary or relevant to the operation 
and regulation of the CBSX platform. Paragraph (a) of Rule 52.5 is 
being eliminated because it merely describes order maintenance 
functionality available to users and that sort of descriptive language 
is not normally contained in exchange rules. Paragraph (b) of Rule 52.5 
is being eliminated because the Exchange does not want to prohibit 
market participants from resting buy and sell orders simultaneously in 
the same security. Rule 53.3(a)(2) is being eliminated because the 
Exchange does not believe it is necessary to limit a member's ability 
to fill a customer order only pursuant to the CBSX crossing rule (Rule 
52.11). Rule 53.7 is being eliminated because the Exchange does not 
contemplate trading SuperShares at this time. Rule 53.52 is being 
eliminated because CBSX would not utilize (and does not need) the 
concept of individual DPM Designees (DPM firms are the recognized 
traders). Finally, Rule 53.70 is being eliminated because CBSX would 
not utilize (and does not need) the concept of Clearing Firm Brokers.
j. Inserting ``CBSX''
    The proposed rule change replaces all references to the ``STOC'' 
system or platform with ``CBSX'' and also replaces references to 
various Exchange committees with ``CBSX.''
k. Conclusion
    In conclusion, the Exchange believes that CBSX would provide a fast 
and competitive stock trading platform that would be attractive to 
customers. The Exchange anticipates launching CBSX concurrent with the 
start of the compliance date for Regulation NMS. Accordingly, the 
Exchange requests that the proposed rule change not take effect or 
become operative until February 5, 2007. The Exchange notes that 
existing Chapters 50-55 are approved as a pilot which terminates in 
connection with the compliance dates for Regulation NMS. The Exchange 
hopes approval of these rule changes would allow a seamless migration 
to CBSX at that time.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\13\ Specifically, the Exchange believes the proposed 
rule change is consistent with the requirements of Section 6(b)(5) \14\ 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, and to protect investors and the public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that this 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

    No written comments were solicited or received 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)

[[Page 1353]]

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 Exchange consents, the Commission 
will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

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-CBOE-2006-112 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 Number SR-CBOE-2006-112. 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 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 Number SR-CBOE-2006-112 and should be submitted on or before 
February 1, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-208 Filed 1-10-07; 8:45 am]
BILLING CODE 8011-01-P