[Federal Register: November 23, 2004 (Volume 69, Number 225)]
[Notices]
[Page 68197-68200]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no04-94]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50682; File No. SR-CBOE-2004-45]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto Relating to the Trading of Complex Orders on the
CBOE Hybrid System
November 17, 2004.
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 July 19, 2004, 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 prepared by the CBOE.
On November 8, 2004, the CBOE: submitted Amendment No. 1 to the
proposed rule change; withdrew Amendment No. 1; and submitted Amendment
No. 2 to the proposed rule change.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 2, CBOE replaced in its entirety the
original proposed rule filing. Amendment No. 2 is incorporated into
this notice.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to adopt a complex order rule applicable to
trading on the CBOE Hybrid System. The text of the proposed rule change
is set forth below. Proposed new language is in italics; proposed
deletions are in [brackets].
Rule 6.45 Priority of Bids and Offers--Allocations of Trades
* * * * *
(a)-(d) No change.
(e) Complex Order Priority Exception: A [member holding a] spread,
straddle, combination, or ratio order (or a stock-option order or
security future-option order, as defined in Rule 1.1(ii)(b) and Rule
1.1(zz)(b), respectively) may be executed at [and bidding (offering)
on] a net debit or credit [basis] price (in a multiple of the minimum
increment) [may execute the order] with another member without giving
priority to equivalent bids (offers) in the trading crowd or in the
book provided at least one leg of the order betters the corresponding
bid (offer) in the book. Stock-option orders and security future-option
orders, as defined in Rule 1.1(ii)(a) and Rule 1.1(zz)(a) respectively,
have priority over bids (offers) of the trading crowd but not over bids
(offers) of public customers in the limit order book.
* * * Interpretations and Policies * * *
No change.
Rule 6.45A Priority and Allocation of Trades for CBOE Hybrid System
* * * * *
(a) No change.
(b) (i)-(ii) No change.
(iii) Exception: Complex Order Priority:
A [member holding a] spread, straddle, combination, or ratio order
(or a stock-option order or security future-option order, as defined in
Rule 1.1(ii)(b) and Rule 1.1(zz)(b), respectively) may be executed at
[and bidding (offering) on] a net debit or credit [basis] price (in a
multiple of the minimum increment) [may execute the order] with another
member without giving priority to equivalent bids (offers) in the
trading crowd or in the book provided at least one leg of the order
betters the corresponding bid (offer) in the book. Stock-option orders
and security future-option orders, as defined in Rule 1.1(ii)(a) and
Rule 1.1(zz)(a) respectively, have priority over bids (offers) of the
trading crowd but not over bids (offers) of public customers in the
limit order book.
(c)-(d) No change
* * * Interpretations and Policies
No change
RULE 6.53C COMPLEX ORDERS ON THE HYBRID SYSTEM
(a) Definition: A complex order is any order for the same account
as defined below:
1. Spread Order: A spread order is as defined in Rule 6.53(d).
2. Straddle Order: A straddle order is as defined in Rule 6.53(f).
3. Strangle Order: A strangle order is an order to buy (sell) a
number of call option contracts and the same number of put option
contracts in the same underlying security, which contracts have the
same expiration date (e.g., an order to buy two XYZ June 35 calls and
to buy two XYZ June 40 puts).
4. Combination Order: A combination order is as defined in Rule
6.53(e).
5. Ratio Order: A spread, straddle or combination order may consist
of legs that have a different number of contracts, so long as the
number of contracts differs by a permissible ratio.
[[Page 68198]]
For purposes of this section, a permissible ratio is any ratio that is
equal to or greater than one-to-three (.333) and less than or equal to
three-to-one (3.00). For example, a one-to-two (.5) ratio, a two-to-
three (.667) ratio, or a two-to-one (2.00) ratio is permissible,
whereas a one-to-four (.25) ratio or a four-to-one (4.0) ratio is not.
6. Butterfly Spread Order: A butterfly spread order is an order
involving three series of either put or call options all having the
same underlying security and time of expiration and, based on the same
current underlying value, where the interval between the exercise price
of each series is equal, which orders are structured as either (i) a
``long butterfly spread'' in which two short options in the same series
offset by one long option with a higher exercise price and one long
option with a lower exercise price or (ii) a ``short'' butterfly
spread'' in which two long options in the same series are offset by one
short option with a higher exercise price and one short option with a
lower exercise price.
7. Box/Roll Spread Order: Box spread means an aggregation of
positions in a long call option and short put option with the same
exercise price (``buy side'') coupled with a long put option and short
call option with the same exercise price (``sell side'') all of which
have the same aggregate current underlying value, and are structured as
either: A) a ``long box spread'' in which the sell side exercise price
exceeds the buy side exercise price or B) a ``short box spread'' in
which the buy side exercise price exceeds the sell side exercise price.
8. Collar Orders and Risk Reversals: A collar order (risk reversal)
is an order involving the sale (purchase) of a call (put) option
coupled with the purchase (sale) of a put (call) option in equivalent
units of the same underlying security having a lower (higher) exercise
price than, and same expiration date as, the sold (purchased) call
(put) option.
9. Conversions and Reversals: A conversion (reversal) order is an
order involving the purchase (sale) of a put option and the sale
(purchase) of a call option in equivalent units with the same strike
price and expiration in the same underlying security, and the purchase
(sale) of the related instrument.
(b) Types of Complex Orders: Complex orders may be entered as fill-
or-kill, immediate or cancel, or as all-or-none orders as defined in
Rule 6.53, or as good-'til-cancelled.
(c) Complex Order Book
(i) Routing of Complex Orders: Complex orders will route either to
PAR or the Complex Order Book (``COB''), as determined by the
appropriate Exchange committee on a class by class basis. All
pronouncements regarding routing procedures will be announced to the
membership via Regulatory Circular. The appropriate Exchange committee
also will determine whether to allow complex orders from non-broker-
dealer public customers and from broker-dealers that are not market
makers or specialists on an options exchange to route from PAR to the
COB.
(ii) Priority of Complex Orders in the COB: Orders from public
customers have priority over orders from non-public customers. Multiple
public customer complex orders at the same price are accorded priority
based on time.
(iii) Execution of Complex Orders in the COB: Complex orders
resting in the COB may be executed without consideration to prices of
the same complex orders that might be available on other exchanges.
Complex orders resting in the COB may trade in the following way:
(1) Orders in the Electronic Book (``EBook''): A complex order in
the COB will automatically execute against individual orders or quotes
residing in EBook provided the complex order can be executed in full
(or in a permissible ratio) by the orders in EBook.
(2) Orders in COB: Complex orders in the COB that are marketable
against each other will automatically execute.
(3) Market participants, as defined in CBOE Rule 6.45A, may submit
orders to trade against orders in the COB. The allocation of complex
orders among market participants shall be done pursuant to CBOE Rule
6.45A(c).
(iv) Complex orders in the COB may be designated as day orders or
good-til-cancelled orders. Only those complex orders with no more than
four legs and having a ratio of one-to-three or lower, as determined by
the appropriate Exchange committee, are eligible for placement into the
COB.
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 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 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
Complex orders typically involve multiple option orders (which may
be coupled with stock) executed simultaneously as part of the same
strategy. Currently, these orders route to the PAR terminal in the
trading crowd where they are announced to the trading crowd and are
traded in open outcry. As an enhancement to the CBOE Hybrid System
(``Hybrid''), the Exchange intends to develop a complex order book
(``COB''), which will facilitate more automated handling of complex
orders.\4\ Additionally, the Exchange proposes to adopt a separate
complex order rule applicable solely to the Hybrid system.
---------------------------------------------------------------------------
\4\ This new proposed rule will not apply to complex order
trading in non-Hybrid classes.
---------------------------------------------------------------------------
1. Definitional
Proposed paragraph (a) of CBOE Rule 6.53C is a definitional
section. The first five order types in that section (spread order,
straddle order, strangle order, combination order, and combination
order with non-equity option legs) are defined in other CBOE rules
(most notably CBOE Rule 6.53, Certain Types of Orders Defined) but for
ease of reference, the Exchange includes them in this new rule. The
next four order type definitions (ratio order, butterfly spread order,
box/roll spread order, collar order) are new but are substantially
identical to those contained in International Securities Exchange, Inc.
(``ISE'') Rule 722(a)(6-9). The last order type definitions are for
conversions and reversals, which are a type of stock-option order as
defined in CBOE Rule 1.1(ii). They are included here merely for ease of
reference.
2. Complex Order Book
A. Routing Complex Orders: Proposed paragraph (c) governs the COB.
Proposed paragraph (i) governs routing and provides that the
appropriate Exchange committee will determine whether complex orders
should route to PAR or the COB on a class by class basis. Anytime the
committee changes or amends its routing procedures, it will announce
such changes to the membership via Regulatory Circular. This will
provide that all Exchange members will have access to all current
information regarding the routing of complex orders.
With respect to the handling of orders that route to PAR, the PAR
operator will
[[Page 68199]]
announce the order to the trading crowd. Any member of the trading
crowd will then have the ability to trade the order at the limit price
or he/she may offer price improvement. Alternatively, trading crowd
members may choose not to trade the order, in which case it will reside
on PAR until the PAR operator ``books it.'' If a complex order becomes
marketable while it is on PAR, the Exchange sends a notification to the
PAR operator. Proposed paragraph (c)(iii) governs execution of orders
in the COB and is described below.
As stated in the introductory paragraph of this rule filing,
complex orders currently route to, and continue to reside on, PAR until
they are traded in open outcry. Accordingly, manual intervention is
necessary before complex orders will execute. The proposal enhances the
treatment of complex orders by making them eligible for placement into
an electronic format (i.e., into the COB). Once these orders rest in
the COB, they may trade electronically (as described below), which
means that they may trade more quickly than they otherwise may have in
an open outcry environment. Moreover, orders residing on PAR are not
displayed. When orders are routed into the COB, members with an
interface connection to CBOE will have the ability to view complex
orders resting in the COB, which enhances transparency. For these
reasons, the Exchange believes routing complex orders into the COB will
enhance the treatment these orders currently receive and allow the
Exchange to compete more effectively for this type of order flow.
Finally, the appropriate Exchange committee also will determine
whether to allow complex orders from non-broker-dealer public customers
and from broker-dealers that are not market makers or specialists on an
options exchange to route from PAR to the COB. Proposed paragraph
(c)(iv) provides that only those complex orders with no more than four
legs and having a ratio of one-to-three or lower, as determined by the
appropriate Exchange committee, are eligible for placement into the
COB.
B. Trading Complex Orders: When the PAR operator ``books'' the
order, it will route directly into the COB. Once in the COB, the order
may trade in one of three ways. If individual orders or quotes in the
Exchange's electronic book (``EBook'') ``line-up'' against the legs of
the complex order, an automatic execution occurs, provided the complex
order can be executed in full (or in a permissible ratio) by the orders
in EBook. Second, if a subsequent incoming complex order is marketable
against the resting complex order in the COB, it will automatically
execute against the resting complex order in the COB upon being
``booked.'' Finally, market participants as defined in CBOE Rule 6.45A
will have the ability to submit orders to trade against the order in
the COB. Under this option, the complex order in the COB would be
allocated to market participants in accordance with the allocation
procedures described in CBOE Rule 6.45A(c).\5\ Proposed paragraph
(c)(iii) provides that complex orders resting in the COB may be
executed without consideration to prices of the same complex orders
that might be available on other exchanges. This is similar to ISE Rule
722(b)(3).\6\
---------------------------------------------------------------------------
\5\ Interpretations and Policies .01 and .02 to CBOE Rule 6.45A
apply to complex orders on the Hybrid System.
\6\ The Options Price Reporting Authority does not disseminate
complex order prices, which eliminates market participants' ability
to know what pricing is available on other exchanges.
---------------------------------------------------------------------------
C. Priority and Complex Orders: This rule filing does not
negatively affect the existing priority rules. In this regard, proposed
paragraph (c)(ii) explicitly provides that orders from public customers
have priority over orders from non-public customers. For example, if
members of the trading crowd wish to trade a complex order resting on
PAR that is marketable against individual public customer orders in the
electronic book, public customers would have priority. Multiple public
customer complex orders at the same price are accorded priority based
on time. The current complex order priority exception contained in CBOE
Rules 6.45 and Rule 6.45A(b)(iii) will continue to be applicable. The
complex order priority exception generally states that a member holding
a qualifying complex order may trade ahead of the book on one leg of
the order provided the other leg of the order betters the corresponding
bid (offer) in the limit order book. For example, assume a complex
order rests in the COB (priced at a net debit or credit). If this
resting complex order was marketable against both legs in EBook, the
resting complex order would have already traded automatically. This
makes it impossible for a marketable incoming complex order to trade
ahead of resting orders in Ebook that are marketable against all legs
of the resting complex order. Accordingly, when a marketable incoming
complex order trades against a resting complex order, it is only
because the resting complex order is at a better price than the orders
in Ebook. Finally, because the existing complex order priority rules as
written envision open outcry trading, the Exchange makes minor changes
to the text such that the rules will be applicable to electronic
trading.\7\
---------------------------------------------------------------------------
\7\ As amended, the proposed rule mirrors ISE's complex order
priority rule (Rule 722(b)(2)).
---------------------------------------------------------------------------
Adoption of a complex order rule for Hybrid trading provides a
framework for the trading of complex orders on Hybrid. This, in turn,
should provide investors with greater certainty in the routing of their
complex orders. The Exchange believes that the development of a complex
order trading book will provide deeper and more liquid markets for
complex orders and will provide order entry firms with a trading
platform the exchange believes is more conducive to satisfying their
best execution and due diligence obligations with respect to these
types of orders.
2. Statutory Basis
For these reasons, the Exchange believes the proposed rule change
is consistent with the Act and the rules and regulations under the Act
applicable to a national securities exchange and, in particular, the
requirements of Section 6(b) of the Act.\8\ Specifically, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \9\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78(f)(b).
\9\ 15 U.S.C. 78(f)(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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 has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or
[[Page 68200]]
(ii) as to which the CBOE consents, the Commission will:
(A) By order approve such 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, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2004-45 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CBOE-2004-45. 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 CBOE. 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-2004-45 and should be submitted on or before
December 14, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3284 Filed 11-22-04; 8:45 am]
BILLING CODE 8010-01-P