Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, Relating to Stock-Option Orders, 70356-70357 [E7-23925]

Download as PDF 70356 Federal Register / Vol. 72, No. 237 / Tuesday, December 11, 2007 / Notices V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-Amex-2007– 124), as amended, and proposed rule changes (SR–BSE–2007–50; SR–CBOE– 2007–144; SR–ISE–2007–108; SRNYSEArca-2007–116; SR-Phlx-2007–88) are hereby approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–23923 Filed 12–10–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56903; File No. SR–CBOE– 2007–68] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, Relating to StockOption Orders December 5, 2007. I. Introduction On June 20, 2007, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposal to amend its rules to provide for the electronic handling and execution of stock-option orders. The CBOE filed Amendment No. 1 to the proposal on October 19, 2007.3 The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on October 31, 2007.4 The Commission received no comments regarding the proposed rule change, as amended. This order approves the proposed rule change, as modified by Amendment No. 1. II. Description of the Proposal Currently, stock-option orders 5 are handled manually on the CBOE and the 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 replaces the original filing in its entirety. 4 See Securities Exchange Act Release No. 56701 (October 25, 2007), 72 FR 61694. 5 A stock-option order is an order to buy or sell a stated number of units of an underlying or a pwalker on PROD1PC71 with NOTICES 1 15 VerDate Aug<31>2005 19:12 Dec 10, 2007 Jkt 214001 options component is traded in open outcry. The CBOE proposes to amend CBOE Rule 6.53C, ‘‘Complex Orders on the Hybrid System,’’ to allow stockoption orders to be submitted to the Complex Order Book (‘‘COB’’) or executed via a Complex Order Auction (‘‘COA’’).6 The stock component of a stock-option order will be executed electronically on the CBOE’s electronic stock trading facility, the CBOE Stock Exchange (‘‘CBSX’’), consistent with CBSX’s order execution rules.7 A stockoption order will not be executed on the CBOE’s Hybrid System unless the stock leg is executable on CBSX at the price(s) necessary to achieve the desired net price.8 An electronic stock-option order accepted by the Hybrid System will be auctioned in a COA when the requirements for an auction are met. An unexecuted stock-option order also could be maintained in the COB or on a PAR workstation, either of which would monitor the marketability of the order, taking into account the CBSX market for the execution of the stock component of the order. Under the proposal, the CBOE proposes to process stock-option orders in a manner that is substantially similar to the way that the CBOE currently processes complex orders comprised solely of options. However, a stockoption order submitted to the COB would seek to trade first against other stock-option orders in the COB, and second against individual orders or quotes on the CBOE.9 Similarly, a stockoption order submitted to a COA would trade in the sequence set forth in CBOE Rule 6.53C(d)(v)(1)–(4), except that subparagraph (d)(v)(1), relating to individual orders and quotes residing in the EBook, would be applied last in sequence.10 The CBOE believes that related security coupled with either (a) the purchase or sale of option contract(s) on the opposite side of the market representing either the same number of units of the underlying or related security or the number of units of the underlying security necessary to create a delta neutral position or (b) the purchase or sale of an equal number of put and call option contracts, each having the same exercise price, expiration date and each representing the same number of units of stock as, and on the opposite side of the market from, the underlying security or related security portion of the order. See CBOE Rule 1.1(ii) and CBOE Rule 6.53C(a)(10). 6 See CBOE Rule 6.53C, Commentary .06 (c) and (d). 7 See CBOE Rule 6.53C, Commentary .06(a). 8 See CBOE Rule 6.53C, Commentary .06(a). 9 See CBOE Rule 6.53C, Commentary .06(c). In contrast, a complex order comprised solely of options would seek to execute first against orders and quotes in the EBook, if possible, and then against other complex orders in the COB. See CBOE Rule 6.53C(c)(ii). 10 See CBOE Rule 6.53C, Commentary .06(d). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 because a portion of a stock-option order would be executed on a different platform (CBSX), it is more practical to execute resting stock-option orders against other stock-option orders received by the Hybrid System before scanning for executions against the legs on the CBSX book and the Hybrid options book. The options leg of a stock-option order will not trade ahead of any public customer option resting on the Hybrid book. Specifically, the options leg of a stock-option order will not be executed on the Hybrid System at the CBOE’s best bid (offer) in a series if one or more public customer orders are resting on the electronic book at that price, unless the options leg trades with such public customer order(s).11 Accordingly, the CBOE notes that the proposal is consistent with CBOE Rule 6.45A(b)(iii), which provides the options leg of a stock-option order with priority over bids (offers) in the trading crowd at the same price, but not over public customer bids (offers) in the limit order book at the same price.12 III. Discussion After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.13 In particular, the Commission finds that the proposal is consistent with section 6(b)(5) of the Act,14 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market 11 See CBOE Rule 6.53C, Commentary .06(b). CBOE provides the following example to illustrate how the Hybrid System would protect the priority of a resting public customer options order: a customer enters a stock-option order to buy 100 shares of XYZ (trading at around $40) and sell a 45 call with a net price of $39.00. A public customer order to sell the 45 call for $1 is resting on the Hybrid book. When executing the stock-option order against auction responses, the Hybrid System will not allow the options leg of the transaction to trade at $1 or higher, thereby preserving the resting limit order’s priority at that price. An execution could occur where the options leg prints at $0.99 and the stock trade prints at $39.99, in accordance with CBSX priority rules. This execution would meet the stock-option order’s limit price and would not violate priority on CBOE or CBSX. 13 In approving the proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 14 15 U.S.C. 78f(b)(5). 12 The E:\FR\FM\11DEN1.SGM 11DEN1 Federal Register / Vol. 72, No. 237 / Tuesday, December 11, 2007 / Notices system, and, in general, to protect investors and the public interest. The Commission believes that the proposal could facilitate the execution of stock-option orders on the CBOE by providing for the electronic handling and execution of these orders, which currently must be handled manually. The Commission notes that proposal provides for the execution of stockoption orders in a manner that is consistent with the CBOE’s existing priority rules for stock-option orders, which provide the options leg of a stock-option order with priority over bids (offers) in the trading crowd at the same price, but not over public customer bids (offers) at the same price.15 In addition, the execution of the stock component of a stock-option order on CBSX will be consistent with CBSX’s order execution rules.16 IV. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,17 that the proposed rule change (SR–CBOE–2007– 68), as modified by Amendment No. 1, is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–23925 Filed 12–10–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56876; File No. SR– NASDAQ–2007–068] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Amend the Limited Liability Company Agreement of The NASDAQ Stock Market LLC; and Order Granting Accelerated Approval of the Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 November 30, 2007. pwalker on PROD1PC71 with NOTICES I. Introduction On July 20, 2007, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change, pursuant to section 19(b)(1) of the Securities 15 See CBOE Rule 6.45A(b)(iii). CBOE Rule 6.53C, Commentary .06(a). 17 15 U.S.C. 78s(b)(2). 18 17 CFR 200.30–3(a)(12). 16 See VerDate Aug<31>2005 19:12 Dec 10, 2007 Jkt 214001 Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 to amend its Limited Liability Company Agreement (‘‘LLC Agreement’’). On September 26, 2007, Nasdaq filed Amendment No. 1 to the proposed rule change. The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on October 5, 2007.3 The Commission received no comments on the proposal. On November 16, 2007, Nasdaq filed Amendment No. 2 to the proposed rule change (‘‘Amendment No. 2’’). This notice and order notices Amendment No. 2; solicits comments from interested persons on Amendment No. 2; and approves the proposed rule change, as amended, on an accelerated basis. II. Description of the Proposal Nasdaq proposes to amend its LLC Agreement, which includes its by-laws (‘‘ By-Laws’’) to: (1) Revise the process by which its directors (‘‘Directors’’) are nominated and elected; (2) amend the compositional requirements for its board of directors (‘‘Board’’) and several committees; and (3) make certain other changes as described below. A. Election of Fair Representation Directors Nasdaq proposes to amend its LLC Agreement, including its By-Laws, to revise the process by which the members of its Board are nominated and elected. Section 6(b)(3) of the Act 4 requires a national securities exchange to establish rules that assure a fair representation of its members in the selection of its directors. Nasdaq’s LLC Agreement currently provides that twenty percent of the directors on the Board will be ‘‘Member Representative Directors.’’ 5 The Board appoints a ‘‘Member Nominating Committee,’’ which nominates and creates a list of candidates for each Member Representative Director position on the Board, and nominates candidates for appointment by the Board for each vacant or new position on a committee that is to be filled with a Member Representative under Nasdaq’s ByLaws.6 Additional candidates may be added to the list of candidates for Member Representative Director 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56581 (September 28, 2007), 72 FR 57083 (‘‘Notice’’). 4 15 U.S.C. 78f(b)(3). 5 ‘‘Member Representative Director’’ means a Director ‘‘who has been elected or appointed after having been nominated by the Member Nominating Committee or by a Nasdaq Member * * * ’’ See Exchange By-Laws Article I(q). 6 See Nasdaq By-Laws Article II, Section 1(b) and 3, and Article III, Section 6(b). 2 17 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 70357 positions if a Nasdaq Exchange Member submits a timely and duly executed written nomination to the Secretary of the Exchange.7 These candidates, together with those nominated by the Member Nominating Committee, are then presented to Exchange members for election.8 Under the proposal, the Board will continue to appoint a Member Nominating Committee, which will nominate candidates for each Member Representative Director position on the Board, and nominate candidates for appointment by the Board for each vacant or new position on a committee that is to be filled with a Member Representative under Nasdaq’s By-Laws. In Amendment No. 2,9 Nasdaq proposes to add the requirement that, in appointing the Member Nominating Committee, the Board will consult with representatives of members of the Exchange.10 Also, members will continue to be able to add candidates to the list of candidates for Member Representative Director positions through the petitions process. The timing and method for the petition process will not change pursuant to the proposal. The list of candidates for Member Representative Director positions and the election date will be announced by the Exchange in a Notice to Members and in a prominent location on a publicly accessible Web site. Such announcement also will describe the procedures for Exchange members to nominate candidates for election at the next annual meeting.11 If the list of candidates (comprised of those candidates nominated by the Member Nominating Committee and any candidates added through the petition process) exceeds the number of positions to be elected, a formal notice of the election date and list of candidates will be sent by the Exchange to its members as of the record date at least 10 days, but no more than 60 days, prior to the election date.12 As is currently the case, each Exchange member that is eligible to vote will have the right to cast one vote for each Member Representative Director position to be filled, and the persons on the list of candidates who receive the 7 See Nasdaq By-Laws Article II, Section 1(c). Nasdq By-Laws Article II, Section 2. 9 The text of Amendment No. 2 is available at Nasdaq’s Web site https://nasdaq.complinet.com, at Nasdaq, and at the Commission’s Public Reference Room. 10 See Proposed Nasdaq By-Laws Article III, Section 6(b)(iii). 11 See Proposed Nasdaq By-Laws Article II, Section 1(a). 12 See Proposed Nasdaq By-Laws Article II, Section 1(a) and (c). 8 See E:\FR\FM\11DEN1.SGM 11DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 237 (Tuesday, December 11, 2007)]
[Notices]
[Pages 70356-70357]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-23925]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56903; File No. SR-CBOE-2007-68]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Stock-Option Orders

December 5, 2007.

I. Introduction

    On June 20, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend its rules to provide for the 
electronic handling and execution of stock-option orders. The CBOE 
filed Amendment No. 1 to the proposal on October 19, 2007.\3\ The 
proposed rule change, as modified by Amendment No. 1, was published for 
comment in the Federal Register on October 31, 2007.\4\ The Commission 
received no comments regarding the proposed rule change, as amended. 
This order approves the proposed rule change, as modified by Amendment 
No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the original filing in its 
entirety.
    \4\ See Securities Exchange Act Release No. 56701 (October 25, 
2007), 72 FR 61694.
---------------------------------------------------------------------------

II. Description of the Proposal

    Currently, stock-option orders \5\ are handled manually on the CBOE 
and the options component is traded in open outcry. The CBOE proposes 
to amend CBOE Rule 6.53C, ``Complex Orders on the Hybrid System,'' to 
allow stock-option orders to be submitted to the Complex Order Book 
(``COB'') or executed via a Complex Order Auction (``COA'').\6\ The 
stock component of a stock-option order will be executed electronically 
on the CBOE's electronic stock trading facility, the CBOE Stock 
Exchange (``CBSX''), consistent with CBSX's order execution rules.\7\ A 
stock-option order will not be executed on the CBOE's Hybrid System 
unless the stock leg is executable on CBSX at the price(s) necessary to 
achieve the desired net price.\8\
---------------------------------------------------------------------------

    \5\ A stock-option order is an order to buy or sell a stated 
number of units of an underlying or a related security coupled with 
either (a) the purchase or sale of option contract(s) on the 
opposite side of the market representing either the same number of 
units of the underlying or related security or the number of units 
of the underlying security necessary to create a delta neutral 
position or (b) the purchase or sale of an equal number of put and 
call option contracts, each having the same exercise price, 
expiration date and each representing the same number of units of 
stock as, and on the opposite side of the market from, the 
underlying security or related security portion of the order. See 
CBOE Rule 1.1(ii) and CBOE Rule 6.53C(a)(10).
    \6\ See CBOE Rule 6.53C, Commentary .06 (c) and (d).
    \7\ See CBOE Rule 6.53C, Commentary .06(a).
    \8\ See CBOE Rule 6.53C, Commentary .06(a).
---------------------------------------------------------------------------

    An electronic stock-option order accepted by the Hybrid System will 
be auctioned in a COA when the requirements for an auction are met. An 
unexecuted stock-option order also could be maintained in the COB or on 
a PAR workstation, either of which would monitor the marketability of 
the order, taking into account the CBSX market for the execution of the 
stock component of the order.
    Under the proposal, the CBOE proposes to process stock-option 
orders in a manner that is substantially similar to the way that the 
CBOE currently processes complex orders comprised solely of options. 
However, a stock-option order submitted to the COB would seek to trade 
first against other stock-option orders in the COB, and second against 
individual orders or quotes on the CBOE.\9\ Similarly, a stock-option 
order submitted to a COA would trade in the sequence set forth in CBOE 
Rule 6.53C(d)(v)(1)-(4), except that subparagraph (d)(v)(1), relating 
to individual orders and quotes residing in the EBook, would be applied 
last in sequence.\10\ The CBOE believes that because a portion of a 
stock-option order would be executed on a different platform (CBSX), it 
is more practical to execute resting stock-option orders against other 
stock-option orders received by the Hybrid System before scanning for 
executions against the legs on the CBSX book and the Hybrid options 
book.
---------------------------------------------------------------------------

    \9\ See CBOE Rule 6.53C, Commentary .06(c). In contrast, a 
complex order comprised solely of options would seek to execute 
first against orders and quotes in the EBook, if possible, and then 
against other complex orders in the COB. See CBOE Rule 6.53C(c)(ii).
    \10\ See CBOE Rule 6.53C, Commentary .06(d).
---------------------------------------------------------------------------

    The options leg of a stock-option order will not trade ahead of any 
public customer option resting on the Hybrid book. Specifically, the 
options leg of a stock-option order will not be executed on the Hybrid 
System at the CBOE's best bid (offer) in a series if one or more public 
customer orders are resting on the electronic book at that price, 
unless the options leg trades with such public customer order(s).\11\ 
Accordingly, the CBOE notes that the proposal is consistent with CBOE 
Rule 6.45A(b)(iii), which provides the options leg of a stock-option 
order with priority over bids (offers) in the trading crowd at the same 
price, but not over public customer bids (offers) in the limit order 
book at the same price.\12\
---------------------------------------------------------------------------

    \11\ See CBOE Rule 6.53C, Commentary .06(b).
    \12\ The CBOE provides the following example to illustrate how 
the Hybrid System would protect the priority of a resting public 
customer options order: a customer enters a stock-option order to 
buy 100 shares of XYZ (trading at around $40) and sell a 45 call 
with a net price of $39.00. A public customer order to sell the 45 
call for $1 is resting on the Hybrid book. When executing the stock-
option order against auction responses, the Hybrid System will not 
allow the options leg of the transaction to trade at $1 or higher, 
thereby preserving the resting limit order's priority at that price. 
An execution could occur where the options leg prints at $0.99 and 
the stock trade prints at $39.99, in accordance with CBSX priority 
rules. This execution would meet the stock-option order's limit 
price and would not violate priority on CBOE or CBSX.
---------------------------------------------------------------------------

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds that the 
proposal is consistent with section 6(b)(5) of the Act,\14\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market

[[Page 70357]]

system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \13\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposal could facilitate the 
execution of stock-option orders on the CBOE by providing for the 
electronic handling and execution of these orders, which currently must 
be handled manually. The Commission notes that proposal provides for 
the execution of stock-option orders in a manner that is consistent 
with the CBOE's existing priority rules for stock-option orders, which 
provide the options leg of a stock-option order with priority over bids 
(offers) in the trading crowd at the same price, but not over public 
customer bids (offers) at the same price.\15\ In addition, the 
execution of the stock component of a stock-option order on CBSX will 
be consistent with CBSX's order execution rules.\16\
---------------------------------------------------------------------------

    \15\ See CBOE Rule 6.45A(b)(iii).
    \16\ See CBOE Rule 6.53C, Commentary .06(a).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2007-68), as modified 
by Amendment No. 1, is approved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-23925 Filed 12-10-07; 8:45 am]
BILLING CODE 8011-01-P

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