03-22230. Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to Open Outcry Size Guarantees

August 22, 2003.

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 21, 2003, the Chicago Board Options Exchange, Inc. (“Exchange” or “CBOE”) 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 Exchange. The proposed rule change has been filed by CBOE under Rule 19b-4(f)(6) under the Act.^[3] 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

CBOE proposes to amend its rules relating to open outcry size guarantees in those classes of options that trade on the CBOE Hybrid System (“Hybrid”). Below is the text of the proposed rule change. Proposed new language is in italics.^[4]

* * * * *

Rule 8.7 Obligations of Market Makers

(a)-(c) No change

(d) No Change

(i) Market Maker Trades Less Than 20% Contract Volume Electronically: No change

(A)-(B) No change

(C) Continuous Open Outcry Quoting Obligation: In response to any request for quote by a floor broker or DPM representing an order as agent, market makers must provide a two-sided market complying with the quote width requirements contained in Rule 8.7(b)(iv) for a minimum of ten contracts for non-broker-dealer orders and one contract for broker-dealer orders.

(D) No change

(ii) Market Maker Trades More Than 20% Contract Volume Electronically: No change

(A)-(B) No change

(C) Continuous Open Outcry Quoting Obligation: In response to any request for quote by a floor broker or DPM representing an order as agent, market makers must provide a two-sided market complying with the current quote width requirements contained in Rule 8.7(b)(iv) for a minimum of ten contracts for non-broker-dealer orders and one contract for broker-dealer orders.

* * * * *

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

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

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

1. Purpose

In May 2003, the Commission approved trading rules for Hybrid,^[5] a trading platform that alters the fundamental way in which the Exchange conducts business. Hybrid merges the electronic and open outcry trading models and offers market participants the ability to stream electronically their own quotes. Previously (and currently in non-Hybrid classes), CBOE's disseminated quote represented, for the most part, the Designated Primary Market Maker's (“DPM”) autoquote price. Market makers (“MMs”) were able to affect changes to that quote in open outcry (or by putting up manual quotes). Hybrid offers in-crowd MMs and in-crowd DPMs the opportunity to submit their own firm disseminated market quotes that represent their own trading interest.^[6] In addition, Hybrid permits in-crowd floor brokers, who represent orders on behalf of members, broker-dealers, public customers, and the firm's proprietary account, to enter orders on behalf of their customers for display in the CBOE's best bid or offer (“BBO”).^[7] Whereas, prior to Hybrid, there was only one autoquote price comprising the CBOE disseminated quote, Hybrid allows for the introduction of multiple quotes in the quoting equation.

CBOE Rules 8.7(d)(i)(C) and (d)(ii)(C), which only apply to classes trading on Hybrid, impose a 10-up size requirement for MMs responding to a request for a market in open outcry by a floor broker (“FB”) representing an order as agent.^[8] CBOE represents that the intent of CBOE Rules 8.7(d)(i)(C) and (d)(ii)(C) when adopted was to ensure that FBs representing public customer orders would receive a quote of sufficient depth whenever they requested a market in open outcry. CBOE believes that the plain language of CBOE Rules 8.7(d)(i)(C) and d(ii)(C), however, is overbroad and could be interpreted to apply to broker-dealer (“BD”) orders represented by FBs. Accordingly, the Exchange proposes to amend these two rule provisions to: (a) Limit the applicability of the 10-up size guarantee to public customer orders represented by FBs; and (b) provide that MMs must provide a one-up market to BD orders represented by FBs. This proposed change only affects Hybrid classes and, as such, has no applicability to non-Hybrid classes.

CBOE represents that the proposed changes do not affect the operation of CBOE's Quote Rule (CBOE Rule 8.51), which allows the responsible BD to provide separate quote sizes to public customers and broker-dealers.^[9] FBs representing a public customer order in a Hybrid class will be able to request a quote on behalf of such public customer from MMs in the crowd and will be guaranteed to receive a firm quote for at least ten contracts. At the same time, a FB representing a BD order in a Hybrid class will be able to request a quote on behalf of a BD and will be guaranteed to receive a firm quote for at least one contract. Accordingly, allowing MMs to provide 1-up open outcry markets to BD orders is consistent with their obligations under the CBOE Quote Rule because the BD firm quote requirement, which is one contract, is satisfied.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act ^[10] in general, and furthers the objectives of section 6(b)(5) of the Act ^[11] in particular, in that it is designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices, and, in general, to protect investors and the public interest.

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

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

CBOE neither solicited nor received written comments with respect to the proposed rule change.

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

Because the foregoing proposed rule change (1) does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) by its terms, does not become operative until 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, and the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change,^[12] it has become effective pursuant to Section 19(b)(3)(A) of the Act ^[13] and Rule 19b-4(f)(6) thereunder.^[14]

CBOE has requested that the Commission waive the usual 30-day pre-operative waiting period. The Commission notes that this proposal is substantially similar to existing Pacific Exchange, Inc. (“PCX”) Rule 6.37(b)(5) and Interpretation .05 to PCX Rule 6.37 approved by the Commission.^[15] As a result, the Commission believes that it is consistent with the protection of investors and the public interest to accelerate the operative date because the proposal raises no new regulatory issues. Therefore, the Commission designates that the proposal become operative immediately.^[16]

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

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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. Copies of such filing will also be available for inspection and copying at the principal office of CBOE. All submissions should refer to File No. SR-CBOE-2003-28 and should be submitted by September 23, 2003.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[17]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  17 CFR 240.19b-4(f)(6).

4.  The Commission notes that it added language to the rule text that was inadvertently omitted by CBOE. Telephone call between Steve Youhn, Legal Division, CBOE, and Frank N. Genco, Attorney, Division of Market Regulation (“Division”), Commission, on August 19, 2003.

5.  See Exchange Act Release 47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) (approving File No. SR-CBOE-2002-05).

6.  Telephone conversation between Steve Youhn, Legal Division, CBOE, and Kelly M. Riley, Senior Special Counsel, Division, on August 20, 2003.

7.  Id. Pursuant to CBOE Rule 6.75, floor brokers generally may not execute any orders for which they have been vested with the discretion to choose: the class of options to buy/sell, the number of contracts to buy/sell, or whether the transaction would be one to buy or sell.

8.  CBOE Rule 8.7(d) only applies to Hybrid classes.

9.  The BD firm quote requirement on CBOE is one contract. See CBOE Rule 8.51.

10.  15 U.S.C. 78f(b).

11.  15 U.S.C. 78f(b)(5).

12.  On July 3, 2003, CBOE provided the Commission with written notice of its intent to file the proposed rule change. See letter from Steve Youhn, Legal Division, CBOE, to Nancy Sanow, Assistant Director, Division, Commission, dated July 2, 2003.

13.  15 U.S.C. 78s(b)(3)(A).

14.  17 CFR 240.19b-4(f)(6).

15.  See Securities Exchange Act Release No. 47211 (January 17, 2003), 68 FR 3924 (January 27, 2003) (approving File No. SR-PCX-2002-55).

16.  For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

17.  17 CFR 200.30-3(a)(12).