December 31, 2004
Exchange
Bulletin
Volume 32, Number 54
The Constitution and Rules of the Chicago Options Exchange, Incorporated (“Exchange”), in certain specific instances, require
the Exchange to provide notice to the Exchange membership. To satisfy this requirement, a complimentary copy of the Exchange Bulletin, including the Regulatory Bulletin, is delivered to all effective members on a weekly basis.
CBOE members are encouraged to receive the Exchange and Regulatory Bulletin and Information Circulars via e-mail. E-mail
subscriptions may be obtained by submitting your name, firm, mailing address, e-mail address, and phone number, to
members@cboe.com, or, by contacting the Membership Department by phone, at 312-786-7449. There is no charge for e-mail
delivery of the Exchange and Regulatory Bulletin or for Information Circulars. If you do sign up for e-mail delivery, please
remember to inform the Membership Department of e-mail address changes.
Additional subscriptions for hard copy delivery may be obtained by submitting your name, firm, mailing address, e-mail address and telephone number to: Chicago Board Options Exchange, Accounting Department, 400 South LaSalle, Chicago, Illinois 60605, Attention: Bulletin Subscriptions. The cost of an annual subscription (July 1 through June 30) is $200.00 ($100.00
after January 1), payable in advance. The Exchange reserves the right to limit subscriptions by non-members.
For up-to-date Seat Market Quotes, refer to CBOE.com and click “Seat Market Information” under the “About CBOE” tab. For
access to the CBOE Member Web Site, please also notify the Membership Department using the contact information above.
Copyright © 2004 Chicago Board Options Exchange, Incorporated
SEAT MARKET QUOTES AS OF FRIDAY, DECEMBER 31, 2004
CLASS
CBOE/FULL
CBOT/FULL
BID
$265,000.00
$1,200,000.00
OFFER
$300,000.00
$1,375,000.00
LAST SALE AMOUNT
$270,000.00
$1,340,000.00
LAST SALE DATE
December 29, 2004
December 27, 2004
MEMBERSHIP SALES AND TRANSFERS
From
Van der Moolen Options USA LLC
To
Arclight Securities, LLC
Price/Transfer
$270,000.00
Date
12/29/2004
MEMBERSHIP INFORMATION FOR 12/23/04 THROUGH 12/29/04
Date Posted
MEMBERSHIPAPPLICATIONS RECEIVED FOR
WHICH A POSTING PERIOD IS REQUIRED
Individual Membership Applicants
Date Posted
Daniel D. Mulvihill Jr., Nominee
Robert C. Sheehan & Associates, LLC
665 Greenbay Rd.
Highland Park, IL 60035
12/23/04
Jeffrey Schneider, CBT Registered For
Third Millennium Trading LLC
723 Noble Street
Chicago, IL 60622
12/23/04
Luke C. Mraz, Nominee
Ronin Capital, LLC
2954 N. Racine, 2F
Chicago, IL 60657
12/27/04
Robert J. Leone, Nominee
Cutler Group, LP
1241 W. Lill
Chicago, IL 60614
12/27/04
Brandon S. Koress, Nominee
Cornerstone Partners
2265 Birchwood Lane
Northfield, IL 60093
12/27/04
Lincoln W. Brewer, Nominee
Right Side Trading LLC
8 Seneca Ct.
Burr Ridge, IL 60521
12/29/04
Eric J. Wiejak, Nominee
TJM Investments, LLC
303 W. Madison, Ste. 400
Chicago, IL 60606
12/29/04
Member Organization Applicants
Date Posted
Cygnus Atratus Capital, LLC
Timothy A. Kirchner, Nominee
30 South Wacker, Ste. 2009
Chicago, IL 60606
Timothy A. Kirchner – Member
Cynthia Francque - Member
12/27/04
Blue Capital Asset Management LLC
12/27/04
Lorry A. Lichtenstein, Nominee
790 Estate Drive, Ste. #250
Deerfield, IL 60015
Blue Capital Holdings LLC - Managing Member
Crescent Court Corp. – Member
Lorry Lichtenstein – Shareholder
Favia Inc. – Member
John Favia – Shareholder
Pinhurst Trading Corp. – Member
John T. Colvin – Shareholder
Lorry Lichtenstein – CEO
Brian Casper - CCO
Page 2
December 31, 2004
Volume 32, Number 54
Date Posted
Jefferies Options Execution, LLC
12/27/04
D/B/A JOE, LLC
141 W. Jackson Blvd., Ste. 500
Chicago, IL 60604
Jefferies & Company Inc. – Member
Jefferies Group Inc. - Holding Company
PEAK6 Investments LP – Member
PEAK6 LLC - General Partner
Matthew Hulsizer – Member
Jennifer Just – Member
Matthew Hulsizer – Manager
Anthony M. Sanfilippo - Manager
Baxter Trading LLC
12/27/04
Robert Baxter, CBT Registered For
440 S. LaSalle, Ste. #1822
Chicago, IL 60605
Geneva LLC - Managing Member
Gary R. Silverman - Chairman of the Managing
Member
Daniel C. Williams - President of the Managing Member
MEMBERSHIP LEASES
New Leases
Effective Date
Lessor: G-Bar Limited Partnership
Lessee: AB Financial LLC
Thomas P. Tiernan, NOMINEE
Rate:
.875%
Term: 1 Month
12/27/04
Lessor: Jules Sobel
Lessee: Susquehanna Investment Group
Brian W. Hansen, NOMINEE
Rate:
.875%
Term: Monthly
12/27/04
Lessor: Richard B. Konz
Lessee: Infinium Capital Management, LLC
Douglas S. Komen, NOMINEE
Rate:
.875%
Term: Monthly
12/29/04
Terminated Leases
Termination Date
Lessor: Victor Grevious
Lessee: AB Financial LLC
Thomas P. Tiernan (TJT), NOMINEE
12/27/04
MEMBERSHIP TERMINATIONS
Chicago Board Options Exchange
Lessor(s):
Termination Date
Victor Grevious
1 East Delaware Pl. - Apt. 8J
Chicago, IL 60611
12/27/04
Nominee(s) / Inactive Nominee(s):
Termination Date
Kenneth E. Kwalik (KLK)
SLK-Hull Derivatives LLC
440 S. LaSalle Street, 3rd Floor
Chicago, IL 60605
12/29/04
EFFECTIVE MEMBERSHIPS
Individual Members
Nominee(s) / Inactive Nominee(s):
Effective Date
James A. Massey Jr. (MSS)
12/23/04
ROQ Capital, LLC
440 S. LaSalle - 28th Floor
Chicago, IL 60605
Type of Business to be Conducted: Market Maker
John R. Knuth (HOG)
12/23/04
X-Change Financial Access LLC
128 Hutchins St.
Woodstock, IL 60098
Type of Business to be Conducted: Floor Broker
Geoffrey D. Fahy (FHY)
12/23/04
Susquehanna Investment Group
175 W. Jackson Blvd., Ste. 1700
Chicago, IL 60604
Type of Business to be Conducted: Market Maker/Floor Broker
Gary R. Silverman (GYS)
12/27/04
Vitale Trading LLC
440 S. LaSalle - Ste. 1822
Chicago, IL 60605
Type of Business to be Conducted: Market Maker
Ioannis S. Moraitis (YNI)
12/28/04
SMC Option Management LLC
440 S. LaSalle, 19th Floor
Chicago, IL 60605
Type of Business to be Conducted: Market Maker
CBT Registered For:
Termination Date
Douglas S. Komen (KUG)
12/29/04
Infinium Capital Management, LLC
141 W. Jackson, Ste. 1520
Chicago, IL 60604
Type of Business to be Conducted: Market Maker/Floor Broker
Joseph G. Kinahan (JJJ)
Van der Moolen Options USA LLC
323 Phillippa
Hinsdale, IL 60521
12/27/04
JOINT ACCOUNTS
Todd A. Koster (TKA)
Van der Moolen Options USA LLC
9410 41st Ave.
Pleasant Prairie, WI 53158
12/27/04
Scott D. Force (SKT)
Cornerstone Partners
440 S. LaSalle - Ste. 2500
Chicago, IL 60605
12/28/04
Filip Jakub Duszczyk (FXD)
Infinium Capital Management, LLC
141 W. Jackson Blvd., Ste. 1520
Chicago, IL 60604
12/29/04
Individual Members
New Participants
Acronym
Effective Date
Kevin C. Applehoff
QHO
12/23/04
John F. Burnside
QHO
12/23/04
John J. Kaminsky
QHO
12/23/04
Harry J. Kasprzyk
QHO
12/23/04
David Rodriguez
QHO
12/23/04
Miguel Rosales
QHO
12/23/04
Patrick M. Seguin
QHO
12/23/04
Michael E. Stodden
QHO
12/23/04
Page 3
December 31, 2004
Volume 32, Number 54
New Participants
Acronym
Effective Date
Adrian Velazquez
QHO
12/23/04
James A. Massey Jr.
QXL
12/23/04
James A. Massey Jr.
QOQ
12/23/04
Brian W. Hansen
12/27/04
From:
Nominee For Van der Moolen Options U.S.A. LLC;
Market Maker/Floor Broker
To:
Nominee For Susquehanna Investment Group; Market
Maker/Floor Broker
Geoffrey D. Fahy
QGS
12/23/04
Member Organizations
Brian W. Hansen
QUT
12/27/04
Brady W. Barth
QBK
12/27/04
Infinium Capital Management LLC
12/29/04
From:
Member Organization Affiliated with a CBT Registered
For; Associated with a Market Maker
To:
Lessee; Associated with a Market Maker/Floor Broker
Edward J. Barry Jr.
QBB
12/27/04
Michael E. Sorvillo Jr.
QHG
12/27/04
Terminated Participants Acronym
Termination Date
Joseph G. Kinahan
QJI
12/27/04
Joseph G. Kinahan
QTS
12/27/04
Todd A. Koster
QTS
12/27/04
Brian W. Hansen
QTS
12/27/04
Brian W. Hansen
QJI
12/27/04
Kenneth E. Kwalik
QLL
12/29/04
Kenneth E. Kwalik
QBD
12/29/04
Kenneth E. Kwalik
QIA
12/29/04
CHANGES IN MEMBERSHIP STATUS
Individual Members
Effective Date
Jeff A. Schleusner
12/28/04
From:
Nominee For PEAK6 Capital Management LLC; No
Floor Functions
To:
Nominee For PEAK6 Capital Management LLC; Market
Maker
Chicago Board Options Exchange
Effective Date
Effective Date
G-Bar Limited Partnership
12/27/04
From:
Lessee/Member Organization Affiliated with a CBT
Registered For; Associated with a Market Maker/Floor
Broker
To:
Lessor/Lessee/Member Organization Affiliated with a
CBT Registered For; Associated with a Market Maker/
Floor Broker
MEMBER ADDRESS CHANGES
Individual Members
Effective Date
Erik A. MacKay
872 Bristol Lane
New Lenox, IL 60451
12/27/04
Adam C. Metzger
440 S. LaSalle St., Ste. 1546
Chicago, IL 60605
12/28/04
Garett J. Nesbitt
440 S. LaSalle - Ste. 950
Chicago, IL 60605
12/28/04
Joseph A. El-Etr
209 S. LaSalle, 10th Floor
Chicago, IL 60604
12/29/04
Member Organizations
Effective Date
PEAK6 Capital Management LLC
141 W. Jackson Blvd., Suite 500
Chicago, IL 60604
12/23/04
Page 4
December 31, 2004
Volume 32, Number 54
Chicago Board Options Exchange
RESEARCH CIRCULARS
The following Research Circulars were distributed between December 23 and December 29, 2004. If you wish to read the entire document,
please refer to the CBOE website at www.cboe.com and click on the “Trading Tools” Tab. New listings and series information is also available
in the Trading Tools section of the website. For questions regarding information discussed in a Research Circular, please call The Options
Clearing Corporation at 1-888-OPTIONS.
Research Circular #RS04-713
December 23, 2004
Mobile TeleSystems OJSC (“MBT”)
4-for-1 ADS Split
Ex-Distribution Date: January 3, 2005
Research Circular #RS04-714
December 23, 2004
Meritage Homes Corporation (“MTH”)
2-for-1 Stock Split
Ex-Distribution Date: January 10, 2005
Research Circular #RS04-715
December 23, 2004
*****UPDATE*****
iSharesSM S&P 100® Index Fund
(“IOE/OEM/OEG/OEF/OHW”)
Special Cash Distribution
Ex-Distribution Date: December 27, 2004
Research Circular #RS04-716
December 23, 2004
*****UPDATE*****
iSharesSM Goldman Sach Software Index Fund (“IGV”)
Special Cash Distribution
Ex-Distribution Date: December 27, 2004
Research Circular #RS04-717
December 23, 2004
*****UPDATE*****
iSharesSM Goldman Sach Technology
Index Fund (“IGM”)
Special Cash Distribution
Ex-Distribution Date: December 27, 2004
Research Circular #RS04-718
December 27, 2004
*****REVISED*****
iSharesSM S&P 100® Index Fund
(“IOE/OEM/OEG/OEK/OEF/OHW”)
Special Cash Distribution
Ex-Distribution Date: December 27, 2004
Research Circular #RS04-720
December 29, 2004
PeopleSoft, Inc. (“PSFT/PQO/WOZ/VOP”)
Tender Offer FURTHER EXTENDED by
Pepper Acquisition Corp.
January 5, 2005
Regulatory
Bulletin
Volume RB16, Number 1
The Constitution and Rules of the Chicago Board Options Exchange, Incorporated
(“Exchange”), in certain specific instances, require the Exchange to provide notice to the membership. The weekly Regulatory Bulletin is delivered to all effective members to satisfy this
requirement.
Copyright © 2004 Chicago Board Options Exchange, Incorporated
Regulatory
Circulars
Regulatory Circular RG04-127
Date:
December 21, 2004
To:
Members and Member Organizations
From:
Division of Regulatory Services
Subject:
Regulation SHO (Short Sales)
•
Postponement of Pilot Suspending Price Test in
Certain Stocks
•
SRO Lists of Threshold Securities
Exchange
Contacts:
Robert Gardner
(312) 786-7937
Richard Lewandowski (312) 786-7183
This Regulatory Circular supplements Regulatory Circular RG04-113 – Regulation SHO
(Short Sales)1 . Please refer to RG04-113 for key information regarding Regulation SHO.
KEY POINTS
•
The commencement of a pilot established by the Securities and Exchange
Commission (“SEC”) to allow short sales of a limited number of stocks
without regard to any price test has been reset to May 2, 2005. The pilot
was originally set to commence on January 3, 2005, the compliance date
for all other provisions of Regulation SHO.
•
Each of the self-regulatory organizations (“SRO”) will, on a daily basis,
disseminate a list of threshold securities traded on their respective exchange via an internet website. In the event that a threshold security is
dually listed, it will be included only on the threshold security list of the
SRO that is the primary listing exchange. These lists will be available in a
downloadable file.
•
The SROs will make every effort to have their respective threshold securities list available by 12 AM EST each business day.
•
Threshold securities lists may be found at the following URLs:
New York Stock Exchange
HTML – www.nyse.com/threshold
Text File – www.nyse.com/threshold/NYSEthYYYYMMDD.txt
1
Reg. SHO is described in Exchange Act Release No. 34-50103 (July 28, 2004), 69 FR 48008 (August 6,
2004). An online copy can be found at: www.sec.gov/rules/final/34-50103.htm.
Regulatory Circulars
continued
Regulatory Circular RG04-127 continued
NASDAQ2
HTML – www.nasdaqtrader.com/asp/regsho.asp
Text File–www.nasdaqtrader.com/dynamic/SymDir/
nasdaqthyyyymmdd.txt.txt
Text File- ftp://ftp.nasdaqtrader.com/Symboldirectory/RegSHO
American Stock Exchange
Text File –ftp://ftp.amex.com/amextrader/tradingData/data/RegSHO/Daily/
AMEXTHccyymmdd.txt
Chicago Stock Exchange
Text File - ftp://ftp3.chx.com/regsho/
ARCA / EX
www.archipelago.com (A specific URL extension was not available at
the time of publication.)
•
Some of the above websites may not be operational, or contain a threshold securities file, at the time this Regulatory Circular is published. However, each exchange expects to have its website operational, with a test
file, prior to January 3, 2005.
•
The Boston Stock Exchange, Philadelphia Stock Exchange and National
Stock Exchange are not the primary listing exchange for any securities
at this time and will not be publishing a threshold securities list.
•
Note that text files are dated. The threshold securities list for a given day
is retrieved by entering the year (YYYY or CCYY), month (MM), and day
(DD) in the URL. Also, the last line in a file will be a date/time stamp in
the format YYYYMMDDHHMMSS.
•
Each line of a file will pertain to one security and its associated data.
Text files are in a pipe (“|”) delimited format with the following fields:
Symbol|Security Name|Market Category|Reg. SHO Threshold
Flag|Filler|Filler. (Example: ZZYX|Anyname Inc.|NNM|Y||. NNM denotes
NASDAQ National Market.)
DISCUSSION
On November 30, 2004, the SEC approved a delay in the start of a pilot program that will
suspend all short sale price tests for a limited number of stocks. The pilot period was
originally set to commence on January 3, 2005, but will now commence on May 2, 2005,
and end on April 28, 2006. The terms of the pilot as originally ordered remain unchanged.3
January 3, 2005, continues to be the compliance date for all other provisions of Regulation
SHO.
“Threshold securities” are generally defined in Regulation SHO as equity securities
registered or subject to reporting requirements under the Securities Exchange Act of 1934:
(1) for which there is an aggregate fail to deliver position at a registered clearing agency for
five consecutive settlement days of 10,000 shares or more and that is equal to at least
0.5% of the issue’s total shares outstanding; and (2) are included on a list disseminated by
a self-regulatory organization.
2
Including small cap, OTCBB and other OTC issues.
For the order establishing the pilot, including a list of stocks, see Exchange Act Release No. 34-50104
(July 28, 2004), 69 FR 48032 (August 6, 2004). An online copy can be found at: www.sec.gov/rules/
other/34-50104.htm
3
RB2
January 5, 2005, Volume RB16, Number 1
Regulatory Circulars
continued
Regulatory Circular RG04-127 continued
Under Rule 203, paragraph (b)(3), of Regulation SHO, a clearing broker-dealer is required to
close-out any fail to deliver position resulting from the short sale of a “threshold security”
that has remained open for 13 consecutive settlement days (trade date plus 13 business
days or settlement date plus 10 business days) by immediately purchasing securities of like
kind and quantity. Until the close-out is executed, the clearing broker-dealer and any brokerdealer for which it clears, including a Market-Maker, is prohibited from effecting further
short sales in the subject threshold security, unless, prior to a new short sale, the security is
borrowed or an arrangement to borrow the security is in place.4
Each exchange and securities association is required to publish a daily list of the threshold
securities listed on its respective market, or for which the SRO bears the primary surveillance responsibility. The stock exchanges have determined to disseminate lists of threshold
securities via their internet websites. In the event that a threshold security is traded on more
than one exchange, it will appear only on the threshold securities list of the exchange that is
the primary listing exchange. The exchanges will make every effort to make threshold
securities lists available by 12:00 AM EST each business day. Downloadable text files in a
pipe-delimited format will be available.
Members and member organizations must comply with Rule 203 beginning on January 3,
2005. However, lists of threshold securities will not be generated until January 10, 2005,
because the determination as to whether a security is a threshold security requires a five
day look back.
Questions concerning Regulation SHO may be directed to Richard Lewandowski, (312) 7867183, or Robert Gardner, (312) 786-7937, in the Exchange’s Department of Financial and
Sales Practice Compliance.
Regulatory Circular RG04-128
Date:
December 21, 2004
To:
Members
From: CBOE
Re:
Wireless Systems in the Trading Crowds
The Exchange has recently become aware that members are using wireless routers on
computer and communication systems (“System”) located on the Exchange floor that have
not been approved by the Exchange. The Exchange is reminding all members that completion of a Communication/Computer System Application and Agreement is required prior to
the installation and use of a System on the Exchange floor. In addition, members must
complete a Communication/Computer System Application and Agreement for a material
change to the functionality or the proposed use of a System that has already been approved
by the Exchange. Members who are using Systems in the trading crowds and who have not
submitted a Communication/Computer System Application and Agreement to the Exchange
for such Systems must submit an agreement to the Telecommunications Department.
Completion of Communication/Computer System Application and Agreements by Exchange
members is essential to ensure that use of the System does not jeopardize the integrity and
proper functioning of other members’ Systems, as well as the Exchange’s proprietary systems. Exchange review of the Communication/Computer System Application and Agree4
There is a limited exception for options Market-Makers. If the short sale of a threshold security is
effected to establish or maintain a hedge on option positions that were opened before the security
became a threshold security, neither the close-out requirement nor the pre-borrow requirement for a new
short sale are applicable.
January 5, 2005, Volume RB16, Number 1
RB3
Regulatory Circulars
continued
Regulatory Circular RG04-128 continued
ments also allows the Exchange to determine the proper radio frequency or frequencies
and radio frequency capacities that should be allocated to the member’s System.
Communication/Computer System Application and Agreements are available at the Telecommunications Service Center, 4th Floor. Please contact 786-7611 for further assistance. Any questions regarding this circular may be directed to Fred Mondt of the Telecommunications Service Department at 786-7228.
Regulatory Circular RG04-129
Date:
December 22, 2004
To:
CBOE Members and Member Organizations
From: Regulatory Services Division
Re:
Improper Disclosure of Orders on PAR Terminal
At the direction of the Securities and Exchange Commission, the CBOE hereby advises
its membership that it is a violation of Just & Equitable Principles of Trade and is inconsistent with the Responsibilities of Floor Brokers for any member operating a PAR (or any
agency workstation or order book) to disclose specific order information to the trading
crowd or to any other party prior to such order being represented in open outcry. Such
disclosure would provide an inappropriate informational advantage and could result in other
rules violations if, for instance, the disclosure allowed members to back away from their
quotes.
Similarly, it is a violation of Just & Equitable Principles of Trade and Market-Maker Obligations for any member of the trading crowd trading as a Market-Maker to gain inappropriate
knowledge of orders by, for example, reading a Floor Broker’s PAR screen, and to act on
that material non-public knowledge by modifying his or her market quotes.
As such, the Exchange advises Floor Brokers operating PAR terminals to take the necessary measures to ensure that specific order information is not disclosed to the trading
crowd or to any other party prior to the order being represented in open outcry. Such
measures may include the use of a PAR screen filter or repositioning the PAR screen away
from the direct view of the trading crowd.
Members who require a PAR screen filter or need to have a PAR terminal repositioned
should contact Trading Operations via the Help Desk at (312) 786-7100. PAR screen filters
will be provided to members at no cost, however, members shall be responsible for any
costs associated with the damage, repair, or replacement of this equipment.
Questions concerning this circular may be directed to Karen Calvin at (312) 786-7759 or
Trading Floor Liaison staff at (312) 786-4068.
RB4
January 5, 2005, Volume RB16, Number 1
Regulatory Circulars
continued
Regulatory Circular RG04-130
To:
Members
From:
Legal Division
Date:
December 22, 2004
Re:
New Obvious Error Rule for Equities
Effective immediately, CBOE is implementing a new obvious error rule applicable to
equity options transactions only. Index options and options on ETFs will continue to
be governed by the existing obvious error rule, which is being renumbered as Rule
24.16. This means the CBOE will have two obvious error rules: Rule 6.25 for equity
options transactions and Rule 24.16 for transactions in index options and options on
ETFs. The new obvious error rule is substantially different from the existing rule. This
Regulatory Circular summarizes the new equity rule, which also is attached. In determining
whether the obvious error rule has any application to their equity option transactions, members are advised to review and rely upon the full text of Rule 6.25 and not this summary.
Trades Subject to Review: There are four types of transactions subject to review:
1. Obvious Price Errors: Occurs when the execution price of an electronic transaction is
above or below the Theoretical Price for the series by an amount equal to at least the
amount shown below:
Theoretical Price
Below $2
$2 to $5
Above $5 to $10
Above $10 to $20
Above $20
Minimum Amount
$0.25
$0.40
$0.50
$0.80
$1.00
Definition of Theoretical Price. The Theoretical Price of an option series is, for multiply-listed options, the last bid (offer) price with respect to an erroneous sell (buy) transaction just prior to the trade, disseminated by the competing exchange with the most
liquidity in that option class over the previous two calendar months. If there are no
quotes for comparison, designated Trading Officials (TOs) will determine the Theoretical
Price. For transactions occurring as part of the Rapid Opening System or Hybrid Opening System, Theoretical Price shall be the first quote after the transaction(s) in question
that does not reflect the erroneous transaction(s).
Price Adjustment or Nullification: Obvious Pricing Errors will be adjusted as follows:
Transactions Between CBOE Market-Makers: If both parties involved are CBOE
Market-Makers, erroneous buy (sell) transactions will be adjusted to their Theoretical Price plus (minus) an adjustment penalty of either $.15 if the Theoretical Price
is under $3 or $.30 if the Theoretical Price is at or above $3. For ROS or HOSS
transactions, adjust to the first non-erroneous quote after the erroneous transaction
on CBOE, less (plus) the adjustment penalty.
Transactions Involving at least one non-CBOE Market-Maker: Where one party
to the transaction is not a CBOE Market-Maker, the transaction will be nullified
unless both parties agree to an adjustment price within thirty (30) minutes of notification by Trading Officials of the Obvious Error.
January 5, 2005, Volume RB16, Number 1
RB5
Regulatory Circulars
continued
Regulatory Circular RG04-130 continued
2. No Bid Series: Electronic transactions in series quoted no bid at a nickel (i.e., $0.05
offer) will be nullified provided at least one strike price below (for calls) or above (for puts)
in the same options class was quoted no bid at a nickel at the time of execution.
3. Verifiable Disruptions or Malfunctions of Exchange Systems: Electronic or open
outcry transactions arising out of a “verifiable disruption or malfunction” in the use or operation of any Exchange automated quotation, dissemination, execution, or communication
system will either be nullified or adjusted by TOs. Transactions between CBOE MMs will
be adjusted to Theoretical Price (no penalty). Other transactions will be nullified.
4. Erroneous Print in Underlying: Electronic or open outcry transactions will be nullified
provided the erroneous print in the underlying market is higher or lower than the average
trade in the underlying during a two-minute period before and after the bad print in question
by at least five times the average quote width during the same period.
Notification Requirement: Absent unusual circumstances, members must notify a TO
within 15 minutes after the execution. For “verifiable systems problems,” Trading Officials
may initiate action within 60 minutes of the occurrence.
Review and Determination: Absent unusual circumstances, TOs must render a decision
within 60 minutes of receiving notice and provide prompt verbal notification to the parties
involved.
Appeal to Obvious Error Panel: A party may request the Obvious Error Panel review a
TO decision by submitting a request in writing to any TO within 30 minutes after receiving
verbal notification of a final ruling. The Panel may affirm, overturn, or modify a TO decision
and must do so on trade date (unless appeal is after 2:30pm). The Panel consists of one
TFL and four members (2 MMs and 2 FBs) chosen from EOPC, MPC, and Floor Officials.
Expired Provisions: The new obvious error rule no longer allows adjustment/nullification
of trades executed below intrinsic value or trades executed as the result of an erroneous
quote in the underlying.
For more information, please contact Trading Floor Liaisons, Floor Officials, Andrew Spiwak
at (312) 786-7483, or Steve Youhn at (312) 786-7416.
Rule 6.25
Nullification and Adjustment of Equity Options Transactions
This Rule governs the nullification and adjustment of transactions involving equity options.
Rule 24.16 governs the nullification and adjustment of transactions involving index options
and options on ETFs and HOLDRs. Paragraphs (a)(1) and (2) of this Rule have no applicability to trades executed in open outcry.
(a) Trades Subject to Review
A member or person associated with a member may have a trade adjusted or nullified if, in
addition to satisfying the procedural requirements of paragraph (b) below, one of the following conditions is satisfied:
RB6
January 5, 2005, Volume RB16, Number 1
Regulatory Circulars
continued
Regulatory Circular RG04-130 continued
(1) Obvious Price Error: An obvious pricing error occurs when the execution price
of an electronic transaction is above or below the Theoretical Price for the series by
an amount equal to at least the amount shown below:
Theoretical Price
Below $2
$2 to $5
Above $5 to $10
Above $10 to $20
Above $20
Minimum Amount
$0.25
$0.40
$0.50
$0.80
$1.00
Definition of Theoretical Price. For purposes of this Rule only, the Theoretical Price of
an option series is, for series traded on at least one other options exchange, the last bid
price with respect to an erroneous sell transaction and the last offer price with respect to
an erroneous buy transaction, just prior to the trade, disseminated by the competing
options exchange that has the most liquidity in that option class in the previous two
calendar months. If there are no quotes for comparison, designated Trading Officials
will determine the Theoretical Price. For transactions occurring as part of the Rapid
Opening System (“ROS trades”) or Hybrid Opening System (“HOSS”), Theoretical Price
shall be the first quote after the transaction(s) in question that does not reflect the
erroneous transaction(s).
Price Adjustment or Nullification: Obvious Pricing Errors will be adjusted or nullified
in accordance with the following:
Transactions Between CBOE Market-Makers: Where both parties to the transaction are CBOE Market-Makers, the execution price of the transaction will be adjusted by Trading Officials to the prices provided in Paragraphs (A) and (B) below,
minus (plus) an adjustment penalty (“adjustment penalty”), unless both parties agree
to adjust the transaction to a different price or agree to bust the trade within fifteen
(15) minutes of being notified by Trading Officials of the Obvious Error.
A. Erroneous buy transactions will be adjusted to their Theoretical Price
plus an adjustment penalty of either $.15 if the Theoretical Price is under
$3 or $.30 if the Theoretical Price is at or above $3.
B. Erroneous sell transactions will be adjusted to their Theoretical Price
minus an adjustment penalty of either $.15 if the Theoretical Price is under
$3 or $.30 if the Theoretical Price is at or above $3.
Transactions Involving at least one non-CBOE Market-Maker: Where one of the
parties to the transaction is not a CBOE Market-Maker, the transactions will be
nullified by Trading Officials unless both parties agree to an adjustment price for the
transaction within thirty (30) minutes of being notified by Trading Officials of the
Obvious Error.
(2) No Bid Series: Electronic transactions in series quoted no bid at a nickel (i.e., $0.05
offer) will be nullified provided at least one strike price below (for calls) or above (for
puts) in the same options class was quoted no bid at a nickel at the time of execution.
(3) Verifiable Disruptions or Malfunctions of Exchange Systems: Electronic or open
outcry transactions arising out of a “verifiable disruption or malfunction” in the use or
operation of any Exchange automated quotation, dissemination, execution, or communication system will either be nullified or adjusted by Trading Officials. Transactions that
qualify for price adjustment will be adjusted to Theoretical Price, as defined in paragraph
(a)(1) above.
January 5, 2005, Volume RB16, Number 1
RB7
Regulatory Circulars
continued
Regulatory Circular RG04-130 continued
(4) Erroneous Print in Underlying: A trade resulting from an erroneous print disseminated by the underlying market which is later cancelled or corrected by that
underlying market may be nullified. In order to be nullified, however, the trade must be
the result of an erroneous print that is higher or lower than the average trade in the
underlying security during a two-minute period before and after the erroneous print by
an amount at least five times greater than the average quote width for such underlying
security during the same period.
For purposes of this Rule, the average trade in the underlying security shall be determined by adding the prices of each trade during the four minute time period referenced
above (excluding the trade in question) and dividing by the number of trades during
such time period (excluding the trade in question). For purposes of this Rule, the
average quote width shall be determined by adding the quote widths of each separate
quote during the four minute time period referenced above (excluding the quote in
question) and dividing by the number of quotes during such time period (excluding the
quote in question).
(b) Procedures for Reviewing Transactions
(1) Notification: Any member or person associated with a member that believes it
participated in a transaction that may be adjusted or nullified in accordance with paragraph (a) must notify any Trading Official promptly but not later than fifteen (15) minutes after the execution in question. Absent unusual circumstances, Trading Officials
shall not grant relief under this Rule unless notification is made within the prescribed
time periods.
In the absence of unusual circumstances, Trading Officials (either on their own motion
or upon request of a member) must initiate action pursuant to paragraph (a)(3) above
within sixty (60) minutes of the occurrence of the verifiable disruption or malfunction.
When Trading Officials take action pursuant to paragraph (a)(3), the members involved
in the transaction(s) shall receive verbal notification as soon as is practicable.
(2) Review and Determination: Once a party to a transaction has applied to a Trading
Official for review, the transaction shall be reviewed and a determination rendered,
unless both parties to the transaction agree to withdraw the application for review prior
to the time a decision is rendered.
Absent unusual circumstances (e.g., a large number of disputed transactions arising
out of the same incident), Trading Officials must render a determination within sixty
(60) minutes of receiving notification pursuant to paragraph (b)(1) above. Trading Officials shall promptly provide verbal notification of a determination to the members
involved in the disputed transaction and to the control room.
(c) Obvious Error Panel
(i) Composition. An Obvious Error Panel will be comprised of at least one (1)
Trading Floor Liaison (TFL) and four (4) Exchange members. Fifty percent of the
number of Exchange members on the Obvious Error Panel must be directly engaged in market making activity and fifty percent of the number of Exchange
members on the Obvious Error Panel must act in the capacity of a non-DPM floor
broker. The Exchange members shall be representatives from any of the following Committees: Equity Options Procedure Committee, Equity Market Performance
Committee, and Floor Officials Committee.
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January 5, 2005, Volume RB16, Number 1
Regulatory Circulars
continued
Regulatory Circular RG04-130 continued
(ii) Scope of Review. If a party affected by a determination made under this Rule
so requests within the time permitted in paragraph (b), an Obvious Error Panel will
review decisions made by the Trading Officials under this Rule, including whether
an obvious error occurred, whether the correct Theoretical Price was used, and
whether the correct adjustment was made at the correct price. A party may also
request that the Obvious Error Panel provide relief as required in this Rule in cases
where the party failed to provide the notification required in paragraph (b) and the
Trading Officials declined to grant an extension, but unusual circumstances must
merit special consideration.
(iii) Procedure for Requesting Review. A request for review must be made in
writing within 30 minutes after a party receives verbal notification of a final determination by the Trading Officials under this Rule, except that if notification is made
after 2:30 p.m. Central Time (“CT”), either party has until 8:30 a.m. CT the next
trading day to request review. The Obvious Error Panel shall review the facts and
render a decision on the day of the transaction, or the next trade day in the case
where a request is properly made the next trade day.
(iv) Panel Decision. The Obvious Error Panel may overturn or modify an action
taken by the Trading Officials under this Rule upon agreement by a majority of the
Panel representatives. All determinations by the Obvious Error Panel may be appealed in accordance with paragraph (d) of this rule.
(d) Review by the Appeals Committee
A member affected by a determination made under this rule may appeal such determination
to the Appeals Committee, in accordance with Chapter XIX of the Exchange’s rules. For
purposes of this Rule, a member must be aggrieved as described in Rule 19.1. Notwithstanding any provision in Rule 19.2 to the contrary, a request for review must be made in
writing (in a form and manner prescribed by the Exchange) no later than the close of trading
on the next trade date after the member receives verbal notification of such determination
by Trading Officials.
(e) Negotiated Trade Nullification
A trade may be nullified if the parties to the trade agree to the nullification. When all parties
to a trade have agreed to a trade nullification one party must promptly disseminate cancellation information in OPRA format.
Interpretations and Policies…..
.01 Applicability: Trading Officials may also allow for the execution of ROS trades (and
assign those trades to participating ROS Market-Makers) that were not executed on the
opening but that should have been executed had ROS opened the series at the non-erroneous quote. The Exchange will endeavor to notify its members as soon as practicable after
the correction of an erroneous print and will indicate that this may result in the adjustment of
trades executed pursuant to ROS. The only trades that will be adjusted are those that were
executed on the opening or those that should have executed on the opening. All adjustments will be made during the day when the correction of the erroneous print occurred.
.02 Trading Officials: The term “Trading Officials” means two Exchange members designated as Floor Officials and one member of the Exchange’s trading floor liaison (TFL) staff.
.03 Definitions: For purposes of this Rule, an “erroneous sell transaction” is one in which
the price received by the person selling the option is erroneously low, and an “erroneous buy
transaction” is one in which the price paid by the person purchasing the option is erroneously
high.
January 5, 2005, Volume RB16, Number 1
RB9
Rule Changes,
Interpretations
and Policies
APPROVED RULE CHANGES
The Securities and Exchange Commission (“SEC”) has approved the following change(s)
to Exchange Rules pursuant to Section 19(b) of the Securities Exchange Act of 1934, as
amended (“the Act”). Copies are available from the Legal Division.
The effective date of the rule change is the date of approval unless otherwise noted.
SR-CBOE-2004-66
Restrictions on Borrowing and Lending to Customers
On December 16, 2004, the SEC approved Rule Change File No. SR-CBOE-2004-66,
which filing adopts a new rule restricting registered persons of members or member organizations from borrowing or lending to their customers (Securities Exchange Act Release
No. 50874, 69 FR 76803 (December 22, 2004)). Any questions regarding the rule change
may be directed to Jaime Galvan, Legal Division, at 312-786-7058. The text of the amended
rules is set forth below. New language is italicized.
Rule 9.25 Borrowing From or Lending to Customers
(a)
No person associated with a member or member organization in any
registered capacity may borrow money from or lend money to any customer of such person unless:
(1)
The member or member organization has written procedures allowing
the borrowing and lending of money between such registered persons
and customers of the member or member organization; and
(2)
the lending or borrowing arrangement meets one of the following conditions:
(A)
the customer is a member of such person’s immediate family;
(B)
the customer is a financial institution regularly engaged in the
business of providing credit, financing, or loans, or other entity
or person that regularly arranges or extends credit in the ordinary course of business;
(C)
the customer and the registered person are both registered persons of the same member organization;
(D)
the lending arrangement is based on a personal relationship
with the customer, such that the loan would not have been solicited, offered, or given had the customer and the associated
person not maintained a relationship outside of the broker/customer relationship; or
(E)
the lending arrangement is based on a business relationship
outside of the broker-customer relationship;
(b) Procedures.
(1)
RB10
Members or member organizations must pre-approve in writing
the lending or borrowing arrangements described in subparagraphs (a)(2)(C), (D), and (E) above.
January 5, 2005, Volume RB16, Number 1
Rule Changes,
Interpretations and
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SR-CBOE-2004-66 continued
(2)
With respect to the lending or borrowing arrangements described
in subparagraph (a)(2)(A) above, a member or member
organization’s written procedures may indicate that registered
persons are not required to notify the member or member organization, or receive member or member organization approval either prior to or subsequent to entering into such lending or borrowing arrangements.
(3)
With respect to the lending or borrowing arrangements described
in subparagraph (a)(2)(B) above, a member or member
organization’s written procedures may indicate that registered
persons are not required to notify the member or member organization or receive their approval either prior to or subsequent to
entering into such lending or borrowing arrangements, provided
that the loan has been made on commercial terms that the customer generally makes available to members of the public similarly situated as to need, purpose, and creditworthiness. For purposes of this subparagraph, the member or member organization
may rely on the registered person’s representation that the terms
of the loan meet the above-described standards.
(c) The term immediate family shall include parents, grandparents, mother-in-law or
father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, sonin- law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or
nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent.
SR-CBOE-2004-50
Limitations on DPM Stop Orders
On December 14, 2004, the SEC approved Rule Change File No. SR-CBOE-2004-50, which
filing amends Rule 8.85(a)(viii) regarding limitations on Designated Primary Market-Makers
putting into effect stop orders. Amendement No. 1 makes clarifying word changes to the
proposed language (Securities Exchange Act Release No. 50853, 69 FR 76510 (December
21, 2004)). Any questions regarding the rule change may be directed to Angelo Evangelou,
Legal Division, at 312-786-7464. The text of the amended rules is set forth below. New
language is italicized.
8.85
DPM Obligations
(a) Dealer Transactions. Each DPM shall fulfill all of the obligations of a MarketMaker under the Rules, and shall satisfy each of the following requirements in
respect of each of the securities allocated to the DPM. To the extent that there is
any inconsistency between the specific obligations of a DPM set forth in subparagraphs (a)(i) through (a)(x) of this Rule and the general obligations of a MarketMaker under the Rules, subparagraphs (a)(i) through (a)(x) of this Rule shall govern. Each DPM shall:
(i)-(vii)
January 5, 2005, Volume RB16, Number 1
No change.
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Rule Changes,
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SR-CBOE-2004-50 continued
(viii)
With respect to non-Hybrid classes and orders in Hybrid classes that are
not received by the Exchange electronically, not initiate a transaction for
the DPM’s own account that would result in putting into effect any stop or
stop limit order which may be in the book or which the DPM represents
as Floor Broker except with the approval of a Floor Official and when the
DPM guarantees that the stop or stop limit order will be executed at the
same price as the electing transaction. The restrictions set forth in this
paragraph do not apply to stop or stop limit orders received through the
Hybrid System unless the terms of such orders are visible to the DPM, or
unless such orders are handled by the DPM;
(ix)-(xi)
No change.
(b)-(e)
No change.
SR-CBOE-2004-76
Amended Fee Schedule
On December 10, 2004, the SEC approved Rule Change File No. SR-CBOE-2004-76,
which filing amends the CBOE Fee Schedule to establish a $.10 per contract license fee
on all Designated Primary Market-Maker and Market-Maker contracts traded in options on
the Mini-Nasdaq-100 Index (“MNX”) (Securities Exchange Act Release No. 50837, 69 FR
75575 (December 17, 2004)). Any questions regarding the rule change may be directed to
Jaime Galvan, Legal Division, at 312-786-7058. The text of the amended Fee Schedule is
available from the Legal Division, or can be accessed online at www.cboe.com, under the
“About CBOE” link.
SR-CBOE-2004-79
ETF and QQQ Trading Periods Clarifications
On December 10, 2004, the SEC approved Rule Change File No. SR-CBOE-2004-79,
which filing revises CBOE Rule 6.1.03 to clarifiy that the Exchange may trade options on
ETFs and on the Nasdaq-100 Index Tracking Stock (QQQ) until 3:15 p.m. (CST). The rule
change also codifies the hours of trading for options on ETFs and QQQs, and revises the
rule text and language in the rule filing by replacing the terms Exchange Traded Fund or
ETF with “Units”. (Securities Exchange Act Release No. 50840, 69 FR 75573 (December
17, 2004)). Any questions regarding the rule change may be directed to Jim Flynn, Legal
Division, at 312-786-7070. The text of the amended rules is set forth below. New language
is italicized.
Rule 6.1 – Days and Hours of Business
No change.
. . . Interpretations and Policies:
.01 - .02 No change.
.03
Options on Units, as defined under Interpretation and Policy .06 to Rule
5.3, and options on the Nasdaq-100 Index Tracking Stock may be traded on the
Exchange until 3:15 p.m. each business day.
RB12
January 5, 2005, Volume RB16, Number 1
Rule Changes,
Interpretations and
Policies continued
SR-CBOE-2004-79 continued
.04 The Board of Directors has determined that the Exchange will not be open for
business on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day or Christmas Day. The Board has also determined that, when any holiday observed by the
Exchange falls on a Saturday, the Exchange will not be open for business on the
preceding Friday, and that when any holiday observed by the Exchange falls on a
Sunday, the Exchange will not be open for business on the following Monday,
unless unusual business conditions exist at the time.
.05 No change.
Rule 6.2 – 6.85 No change.
PROPOSED RULE CHANGES
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, as amended (“the
Act”), and Rule 19b-4 thereunder, the Exchange has filed the following proposed rule changes
with the Securities and Exchange Commission (“SEC”). Copies of the rule change filings
are available from the Legal Division. Members may submit written comments to the Legal
Division.
The effective date of a proposed rule change will be the date of approval by the SEC, unless
otherwise noted.
SR-CBOE-2004-88
Amended Fee Schedule
On December 21, 2004, the Exchange filed Rule Change File No. SR-CBOE-2004-88, which
filing proposes to amend the Exchange Fee Schedule to make permanent the Customer
Large Trade Discount Program and to lower the contract volume fee cap for Dow Jones
Index options. Any questions regarding the proposed rule change may be directed to Jaime
Galvan, Legal Division, at 312-786-7058. The text of the amended Fee Schedule is available from the Legal Division, or can be accessed online at www.cboe.com, under the
“About CBOE” link.
SR-CBOE-2004-82
Regulatory Oversight Committee
On December 8, 2004, the Exchange filed Rule Change File No. SR-CBOE-2004-82, which
filing proposes to amend Exchange Rule 17.10(d) by transferring the power to review the
decision not to initiate charges from the President of the Exchange to the Regulatory Oversight Committee and by changing the time to assess such a review from 30 days to 45
days. Any questions regarding the proposed rule change may be directed to Andrew Spiwak,
Legal Division, at 312-786-7483. The text of the proposed rule amendments is set forth
below. Proposed new language is underlined. Proposed deleted language is [stricken out].
A copy of the filing is available from the Legal Division.
Rule 17.10 – Review
(a)
(b)
(c)
January 5, 2005, Volume RB16, Number 1
No change.
No change.
No change.
RB13
Rule Changes,
Interpretations and
Policies continued
SR-CBOE-2004-82 continued
(d) Review of Decision Not to Initiate Charges. Upon application made by the
[President within 30 days of a decision made pursuant to Rule 17.4(a) of this
chapter,] Regulatory Oversight Committee within 45 days from the date the Exchange serves the Subject with notice of a decision by the Business Conduct
Committee pursuant to Rule 17.4(a) not to initiate charges that have been recommended by Exchange staff, the Board may order review of such decision. Such
review shall be conducted in accordance with the procedures set forth in paragraph (b) as applicable.
SR-CBOE-2004-85
Non-Public Customer Order Priority
On December 15, 2004, the Exchange filed Rule Change File No. SR-CBOE-2004-85,
which filing proposes to modify Exchange Rule 8.85(b)(iii) to provide that DPMs must
accord priority to all customer orders, that the DPM represents as agent over the DPM’s
principal transactions, unless the customer who placed the order has consented to not
being accorded such priority. Any questions regarding the proposed rule change may be
directed to Angelo Evangelou, Legal Division, at 312-786-7464. The text of the proposed
rule amendments is set forth below. Proposed new language is underlined. Proposed
deleted language is [stricken out]. A copy of the filing is available from the Legal Division.
Rule 8.85 DPM Obligations
(a) No change.
(b) Agency Transactions. Each DPM shall fulfill all of the obligations of a Floor
Broker (to the extent that the DPM acts as a Floor Broker) and of an Order Book
Official under the Rules, and shall satisfy each of the following requirements, in
respect of each of the securities allocated to the DPM:
(i)-(ii) No change.
(iii) accord priority to any [public] customer order which the DPM represents as
agent over the DPM’s principal transactions, unless the customer who placed the
order has consented to not being accorded such priority;
(iv)-(vii) No change.
(c)-(e) No change.
…Interpretations and Policies:
.01-.04 No change.
SR-CBOE-2004-86
Modified ROS Opening Procedure
On December 15, 2004, the Exchange filed Rule Change File No. SR-CBOE-2004-86,
which filing revises Exchange Rule 6.2A.03 to require market participant unwinding hedges
and other related trading activities in volatility futures to submit orders for placement in the
book for the corresponding index options by 8:00 a.m. The proposed rule also requires all
Exchange orders for placement in the book for the opening to be placed by 8:25 a.m.,
instead of the current 8:28 a.m. Any questions regarding the proposed rule change may be
directed to David Doherty, Legal Division, at 312-786-7466. The text of the proposed rule
amendments is set forth below. Proposed new language is underlined. Proposed deleted
language is [stricken out]. A copy of the filing is available from the Legal Division.
RB14
January 5, 2005, Volume RB16, Number 1
Rule Changes,
Interpretations and
Policies continued
SR-CBOE-2004-86 continued
Rule 6.2A. Rapid Opening System
This rule has no applicability to series trading on the CBOE Hybrid Opening System. Such series will be governed by Rule 6.2B.
(a) – (d)
No change.
. . . Interpretation and Policies:
.01 - .02
No change.
.03
Modified ROS Opening Procedure For Calculation of Settlement Prices of
Volatility Indexes.
All provisions set forth in Rule 6.2A and the accompanying interpretations and
policies shall remain in effect unless superseded or modified by this Rule 6.2A.03.
To facilitate the calculation of a settlement price for futures and options contracts
on volatility indexes, the Exchange shall utilize a modified ROS opening procedure
for any index option series with respect to which a volatility index is calculated
(including any index option series opened under Rule 6.2A.01). This modified ROS
opening procedure will be utilized only on the final settlement date of the options
and futures contracts on the applicable volatility index in each expiration month.
The following provisions shall be applicable when the modified ROS opening procedure set forth in this Rule 6.2A.03 is in effect for an index option with respect to
which a volatility index is calculated:
(i) [a]All orders (including public customer, broker-dealer, Exchange Market-Maker
and away Market-Maker and specialist orders), other than contingency orders, will
be eligible to be placed on the Electronic Book for those option contract months
whose prices are used to derive the volatility indexes on which options and futures
are traded, for the purpose of permitting those orders to participate in the ROS
opening price calculation for the applicable index option series[;].
(ii) [a]All Market-Makers, including any LMMs and SMMs, if applicable, who are
required to log on to ROS or RAES for the current expiration cycle shall be required
to log on to ROS during the modified ROS opening procedure if the Market-Maker is
physically present in the trading crowd for that index option class[;].
(iii) [i]If the ROS system is implemented in an option contract for which LMMs have
been appointed, the LMMs will collectively set the Autoquote values that will be
used by ROS[;].
(iv) ROS contracts to trade for that index option series will be assigned equally, to
the greatest extent possible, to all logged-on Market-Makers, including any LMMs
and SMMs if applicable[;].
(v) All index option orders for participation in the modified ROS opening procedure
that are related to positions in, or a trading strategy involving, volatility index options or futures, and any change to or cancellation of any such order.
(A) must be received prior to 8:00 a.m. (CST), and
January 5, 2005, Volume RB16, Number 1
RB15
Rule Changes,
Interpretations and
Policies continued
SR-CBOE-2004-86 continued
(B) may not be cancelled or changed after 8:00 a.m. (CST), unless the order is not
executed in the modified ROS opening procedure and the cancellation or change
is submitted after the modified ROS opening procedure is concluded (provided
that any such order may be changed or cancelled after 8:00 a.m. (CST) and prior
to 8:25 a.m. (CST) in order to correct a legitimate error, in which case the member
submitting the change or cancellation shall prepare and maintain a memorandum
setting forth the circumstances that resulted in the change or cancellation and
shall file a copy of the memorandum with the Exchange no later than the next
business day in a form and manner prescribed by the Exchange).
The provisions of this subparagraph (v) may be suspended by two Floor Officials
in the event of unusual market conditions.
(vi) [a]All other index option orders for participation in the modified ROS opening
procedure, and any change to or cancellation of any such order, must be received
prior to 8:25 a.m. [8:28 a.m.] (CST) in order to participate at the ROS opening
price for the applicable [that] index option series[;].
(vii) [a]All orders for participation in the modified ROS opening procedure must be
submitted electronically, except that Market-Makers on the Exchange’s trading
floor may submit paper tickets for market orders only[; and].
(viii) [u]Until the Exchange implements a ROS system change that automatically
generates cancellation orders for Exchange Market-Maker, away Market-Maker,
specialist, and broker dealer orders which remain on the Electronic Book following
the modified ROS opening procedure, any such orders that were entered in the
Electronic Book but were not executed in the modified ROS opening procedure
must be cancelled immediately following the opening of the applicable option
series.
SR-CBOE-2004-87
Index Products on Hybrid
On December 17, 2004, the Exchange filed Rule Change File No. SR-CBOE-2004-87,
which filing proposes to adopt rules for trading index products on Hybrid with or without a
DPM. Any questions regarding the proposed rule change may be directed to Steve Youhn,
Legal Division, at 312-786-7416. The text of the proposed rule amendments is set forth
below. Proposed new language is underlined. Proposed deleted language is [stricken out].
A copy of the filing is available from the Legal Division.
Rule 6.1
Days and Hours of Business
*****
….Interpretations and Policies
.01 - .04
No change.
.05 For those option classes and within such time periods as the appropriate Floor
Procedure Committee, MTS or the President of the Exchange may designate,
members may, prior to the scheduled opening rotation, enter option market quote
indications based upon the anticipated opening price of the security underlying
such designated option class. This interpretation will not impose upon members
an affirmative responsibility to provide and post pre-opening option market quote
indicators. Generally, pre-opening option market quote indications would be provided by members for options classes whose underlying security is sold over-thecounter and those option classes whose underlying security shows little market
volatility.
RB16
January 5, 2005, Volume RB16, Number 1
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SR-CBOE-2004-87 continued
The following procedures shall be followed by members and the Order Book Official, [or] DPM, or LMM when posting pre-opening option market quote indications.
(a) For those options classes designated as eligible for pre-opening option market
quote indications the OBO, [or] DPM, or LMM shall, no earlier than 8:15 a.m. (CT),
request market quote indications from the members present in the trading crowd.
(b) The members and DPM or LMM may then provide pre-opening option market
quote indications at which time the OBO, [or] DPM, or LMM shall post these indications. Upon the opening of the underlying security and in no case earlier than 8:30
a.m. (CT) the OBO, [or] DPM, or LMM shall request verbal confirmation from the
trading crowd that such pre-opening option market quote indications reflect the
actual market and constitute valid opening quotations. If the crowd indicates that
such pre-opening option market quote indications reflect the actual market and
constitute valid opening quotations, the OBO, [or] DPM, or LMM shall determine
that a simultaneous opening rotation has occurred. If they do not confirm the indications, an opening rotation in accordance with applicable Exchange Rules for all
series in which floor brokers in the crowd or the Book hold executable limit or
market orders will be held. After such orders have been executed, the OBO, [or]
DPM, or LMM) shall declare the option class open and the series subject to applicable Exchange Rules.
(c) Notwithstanding paragraphs (a) and (b), the OBO, [or] DPM, or LMM shall direct
that an opening rotation take place pursuant to applicable exchange Rules if (i) the
OBO, [or] DPM, or LMM fails to receive market quote indications; or (ii) the underlying security opens substantially higher or lower than the opening price anticipated
by the crowd that provided the pre-opening market quote indications; or (iii) there
are substantial order imbalances affecting the options class; or (iv) for such other
reasons as appropriate Floor Officials, the OBO, the DPM, or LMM or the Exchange may determine.
Rule 6.2
Trading Rotations
*****
….Interpretations and Policies
.01 (a) Trading rotations shall be employed at the opening of the Exchange each
business day. For each class of option contracts that has been approved for trading, the opening rotation shall be conducted by the [Board Broker,] Designated
Primary Market-Maker (“DPM”), Lead Market-Maker (“LMM”), or Order Book Official (“OBO”) acting in such class of options. The opening rotation in each class of
options shall be held promptly following the opening of the underlying security on
the principal market where it is traded or after 8:30 a.m. for index options. As a rule,
a [Board Broker,] DPM, LMM, or OBO acting in more than one class of options
should open them in the same order in which the underlying securities are opened.
(b) In conducting each such opening rotation, the [Board Broker,] DPM, LMM, or
OBO should ordinarily first open the one or more series of options of a given class
having the nearest expiration, then proceed to the series of options having the next
most distant expiration, and so forth, until all series have been opened. If both puts
and calls covering the same underlying security are traded, the [Board Broker,]
DPM, LMM, or OBO shall determine which type of option will open first, and shall
alternate the opening of put series and call series. A [Board Broker,] DPM, LMM, or
OBO may conduct the opening rotation in another manner only with the approval of
two Floor Officials or at the direction of the appropriate Floor Procedure Committee.
A modified opening rotation such as that described in Interpretation .02 to Rule
24.13 may be conducted for certain index options classes.
January 5, 2005, Volume RB16, Number 1
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(c) In the event an underlying security has not opened within a reasonable time
after 8:30 a.m. (Chicago time), the [Board Broker,] DPM, LMM, or OBO acting in
option contracts on such security shall report the delay to a Floor Official and an
inquiry shall be made to determine the cause of the delay. The opening rotation for
option contracts in such security shall be delayed until the underlying security has
opened unless two Floor Officials determine that the interests of a fair and orderly
market are best served by opening trading in the option contracts.
(d)
No change.
.02 - .05
No change.
Rule 6.2B
Hybrid Opening System
(a) For a period of time before the opening of trading in the underlying security (or
in the case of index options, prior to 8:30 a.m., CT), as determined by the appropriate Floor Procedure Committee (FPC) and announced to the membership via
Regulatory Circular, the Hybrid System will accept orders and quotes. The Hybrid
System will disseminate to market participants (as defined in Rule 6.45A or 6.45B)
information about resting orders in the Book that remain from the prior business
day and any orders submitted before the opening. At a randomly selected time
within a number of seconds after the primary market for the underlying security
disseminates the opening trade or the opening quote (or after 8:30 a.m. for index
options unless unusual circumstances exist), the System initiates the opening
procedure and sends a notice (“Opening Notice”) to market participants who may
then submit their opening quotes. The DPM or any appointed LMM for the class
must enter opening quotes. Spread orders and contingency orders do not participate in the opening trade or in the determination of the opening price.
(b) After the Opening Notice is sent, the System will calculate and provide the
Expected Opening Price (“EOP”) and expected opening size (“EOS”) given the
current resting orders during the EOP Period (“EOP Period”). The appropriate FPC
will establish the duration of the EOP Period on a class basis at between five and
sixty seconds. The EOP, which will be calculated and disseminated to market
participants every few seconds, is the price at which the greatest number of
orders in the Book are expected to trade. After the Opening Notice is sent, quotes
and orders may be submitted without restriction. An EOP may only be calculated
if: (i) there are market orders in the Book, or the Book is crossed (highest bid is
higher than the lowest offer) or locked (highest bid equals lowest offer), and (ii) the
DPM’s quote (or if there is no DPM appointed to the class, at least one quote from
either a Market-Maker or LMM with an appointment in the class) is present and
complies with the legal width quote requirements of Rule 8.7(b)(iv).
(c) – (d) No change.
(e) The System will not open a series if one of the following conditions is met:
(i) In classes in which a DPM has been appointed, [T]there is no quote from the
DPM for the series. In classes in which no DPM has been appointed, there is no
quote from at least one Market-Maker or LMM with an appointment in the class;
(ii) – (iii) No change.
(f) – (i) No change.
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Rule 6.45A
Priority and Allocation of Equity Option Trades on the [for]
CBOE Hybrid System
Generally: The rules of priority and order allocation procedures set forth in this rule
shall apply only to equity option classes designated by the Exchange to be traded
on the CBOE Hybrid System and has no applicability to index option and options on
ETF classes. The term “market participant” as used throughout this rule refers to
a[n in-crowd] Market-Maker, [a Market-Maker complying with the in-person requirements of Rule 8.7.03(B)(1) who submits quotes from off of the floor of the Exchange through the facilities of the Exchange,] an in-crowd DPM, an e-DPM, and a
floor broker representing orders in the trading crowd. The term “in-crowd market
participant” only includes an in-crowd Market-Maker, in-crowd DPM, [or] and floor
broker representing orders in the trading crowd.
(a) Allocation of Incoming Electronic Orders: The Exchange shall apply, for
each class of options, the following rules of trading priority.
(i) * * * * *
(A) No change.
(B) Allocation
(1) No change.
(2) * * * *
Component A: No change.
Component B: No change.
Final Weighting: The final weighting formula for equity options,
which shall be determined by the appropriate FPC and apply uniformly across all options under its jurisdiction, shall be a weighted
average of the percentages derived for Components A and B
multiplied by the size of the incoming order. Initially, the weighting
of Components A and B shall be equal, represented mathematically by the formula: ((Component A Percentage + Component B
Percentage)/2) * incoming order size.
[The final weighting formula for index options and options on ETFs
shall be established by the appropriate FPC and may vary by
product. Changes made to the percentage weightings of Components A and B shall be announced to the membership via Regulatory Circular at least one day before implementation of the change.]
(C) No change.
(b)
No change.
(c)
Interaction of Market Participant’s Quotes and/or Orders with Orders
in Electronic Book
*****
(i) No change.
January 5, 2005, Volume RB16, Number 1
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(ii) * * * * *
Component A: No change.
Component B: No change.
Final Weighting: The final weighting formula for equity options, which shall be
determined by the appropriate FPC and apply uniformly across all options under
its jurisdiction, shall be a weighted average of the percentages derived for Components A and B, multiplied by the size of the order(s) in the electronic book. Initially, the weighting of Components A and B shall be equal, represented mathematically by the formula: ((Component A Percentage + Component B Percentage)/2) * electronic book order size.
[The final weighting formula for index options and options on ETFs shall be established by the appropriate FPC and may vary by product. Changes made to the
percentage weightings of Components A and B shall be announced to the membership via Regulatory Circular at least one day before implementation of the
change.]
(iii)
No change.
(d)
No change.
(e)
Classes Trading on Hybrid
By [December 31, 2003, Hybrid will be operational in CBOE’s 200 most active
equity option classes and, by] December 31, 2004, Hybrid will be operational in
CBOE’s 500 most active equity option classes. The Exchange intends to implement Hybrid floorwide in all other equity classes by the fourth quarter of 2006.
[Index option classes and options on ETFs specifically designated by the appropriate Floor Procedure Committee may trade on the Hybrid System. In order to be
eligible for trading on Hybrid, index option classes and options on ETFs must
utilize an in-crowd Designated Primary Market- Maker.]
Interpretations and Policies . . .
No change.
*****
Rule 6.45B
Priority and Allocation of Trades in Index Options and
Options on ETFs on the CBOE Hybrid System
Generally: The rules of priority and order allocation procedures set forth in this
rule shall apply only to index options and options on ETFs that have been designated by the appropriate Exchange procedures committee for trading on the CBOE
Hybrid System. The term “market participant” as used throughout this rule refers
to a Market-Maker, an in-crowd DPM or LMM, an e-DPM with an appointment in
the subject class, and a floor broker representing orders in the trading crowd. The
term “in-crowd market participant” only includes an in-crowd Market-Maker, incrowd DPM or LMM, and floor broker representing orders in the trading crowd.
(a) Allocation of Incoming Electronic Orders: The appropriate Exchange procedures committee will determine to apply, for each class of options, one of the
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following rules of trading priority described in paragraphs (i) or (ii). The Exchange
will issue a Regulatory Circular periodically specifying which priority rules will govern which classes of options any time the appropriate Exchange committee changes
the priority.
(i) Price-Time or Pro-Rata Priority
Price-Time Priority: Under this method, resting quotes and orders in the book are
prioritized according to price and time. If there are two or more quotes or orders at
the best price then priority is afforded among these quotes or orders in the order in
which they were received by the Hybrid System; or
Pro Rata Priority: Under this method, resting quotes and orders in the book are
prioritized according to price. If there are two or more quotes or orders at the best
price then trades are allocated proportionally according to size (in a pro rata fashion). The executable quantity is allocated to the nearest whole number, with fractions ½ or greater rounded up and fractions less than ½ rounded down. If there are
two market participants that both are entitled to an additional ½ contract and there
is only one contract remaining to be distributed, the additional contract will be distributed to the market participant whose quote or order has time priority.
Additional Priority Overlays Applicable to Price-Time or Pro-Rata Priority
Methods
In addition to the base allocation methodologies set forth above, the appropriate
Exchange procedures committee may determine to apply, on a class-by-class basis, either or both of the following designated market participant overlay priorities.
The Exchange will issue a Regulatory Circular periodically which will specify which
classes of options are subject to these additional priorities as well as any time the
appropriate Exchange procedures committee changes these priorities.
(1) Public Customer: When this priority overlay is in effect, the highest
bid and lowest offer shall have priority except that public customer orders
shall have priority over non-public customer orders at the same price. If
there are two or more public customer orders for the same options series
at the same price, priority shall be afforded to such public customer orders
in the sequence in which they are received by the System, even if the Pro
Rata Priority allocation method is the chosen allocation method. For purposes of this Rule, a Public Customer order is an order for an account in
which no member, non-member participant in a joint-venture with a member, or non-member broker-dealer (including a foreign broker-dealer) has an
interest.
(2) Participation Entitlement: The appropriate Exchange procedures committee may determine to grant DPMs, LMMs, or e-DPMs participation
entitlements pursuant to the provisions of Rule 8.87 or 8.15B. In allocating
the participation entitlement, all of the following shall apply:
January 5, 2005, Volume RB16, Number 1
(A)
To be entitled to their participation entitlement, a DPM’s
or LMM’s order and/or quote must be at the best price.
(B)
A DPM or LMM may not be allocated a total quantity
greater than the quantity that the DPM or LMM is quoting
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(including orders not part of quotes) at that price. If Pro
Rata Priority is in effect, and the DPM’s or LMM’s allocation of an order pursuant to its participation entitlement is greater than its percentage share of quotes/
orders at the best price at the time that the participation
entitlement is granted, the DPM or LMM shall not receive any further allocation of that order.
(C)
In establishing the counterparties to a particular trade,
the DPM’s or LMM’s participation entitlement must first
be counted against the DPM’s or LMM’s highest priority
bids or offers.
(D)
The participation entitlement shall not be in effect unless the Public Customer priority is in effect in a priority
sequence ahead of the participation entitlement and then
the participation entitlement shall only apply to any remaining balance.
(ii) Ultimate Matching Algorithm (“UMA”): Under this method, a market participant who enters a quotation and whose quote is represented by the disseminated
CBOE best bid or offer (“BBO”) shall be eligible to receive allocations of incoming
electronic orders for up to the size of its quote, in accordance with the principles
described below. As an initial matter, if the number of contracts represented in the
disseminated quote is less than the number of contracts in an incoming electronic
order(s), the incoming electronic order(s) shall only be entitled to receive a number of contracts up to the size of the disseminated quote, in accordance with Rule
6.45B(a)(ii)(B). The balance of the electronic order will be eligible to be filled at the
refreshed quote either electronically (in accordance with paragraph (a)(ii)(B) below) or manually (in accordance with Rule 6.45B(b)) and, as such, may receive a
split price execution.
(A) Priority of Orders in the Electronic Book
(1) Public Customer Orders: Public customer orders in the electronic
book have priority. Multiple public customer orders in the electronic book
at the same price are ranked based on time priority. If a public customer
order(s) in the electronic book matches, or is matched by, a market participant quote, the public customer order(s) shall have priority and, the
balance of the incoming order, if any, will be allocated pursuant to Rule
6.45B(a).
(2) Broker-Dealer Orders: If pursuant to Rule 7.4(a) the appropriate Exchange procedures committee determines to allow certain types of broker-dealer orders to be placed in the electronic book, then for purposes of
this rule, the cumulative number of broker-dealer orders in the electronic
book at the best price shall be deemed one “market participant” regardless of the number of broker-dealer orders in the book. The allocation due
the broker-dealer orders in the electronic book by virtue of their being
deemed a “market participant” shall be distributed among each brokerdealer order comprising the “market participant” pursuant to Rule 6.45B(a).
(B) Allocation
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(1) Market Participant Quoting Alone at BBO: When a market participant
is quoting alone at the disseminated CBOE BBO and is not subsequently
matched in the quote by other market participants prior to execution, it will
be entitled to receive incoming electronic order(s) up to the size of its
quote. If another market participant joins in the disseminated quote prior
to execution of an incoming electronic order(s) such that more than one
market participant is quoting at the BBO, incoming electronic order(s) will
be distributed in accordance with (B)(2) below.
(2) More than One Market Participant Quoting at BBO: When more than
one market participant is quoting at the BBO, inbound electronic orders
shall be allocated pursuant to the following allocation algorithm:
Allocation Algorithm
Incoming Order
Size *
(Equal Percentage based on
number of market participants
quoting at BBO)
(Component A)
2
+
(Pro-rata Percentage based
on size of market
participant quotes)
(Component B)
Where:
Component A: The percentage to be used for Component A shall be an
equal percentage, derived by dividing 100 by the number of market participants quoting at the BBO.
Component B: Size Prorata Allocation. The percentage to be used for
Component B of the Allocation Algorithm formula is that percentage that
the size of each market participant’s quote at the best price represents
relative to the total number of contracts in the disseminated quote.
Final Weighting: The final weighting formula, which shall be established
by the appropriate Exchange procedures committee and may vary by product, shall be a weighted average of the percentages derived for Components A and B multiplied by the size of the incoming order. Changes made
to the percentage weightings of Components A and B shall be announced
to the membership via Regulatory Circular at least one day before implementation of the change.
(C) Participation Entitlement: If a DPM, LMM, or e-DPM is eligible for an allocation pursuant to the operation of the Algorithm described in paragraph (a) of Rule
6.45B, the DPM, LMM, or e-DPM may be entitled to receive an allocation (not to
exceed the size of its quote) equal to either:
(1) the greater of the amount it would be entitled to pursuant to the participation right established pursuant to Rule 8.87 or 8.15B (and Regulatory
Circulars issued thereunder) or the amount it would otherwise receive pursuant to the operation of the Algorithm described above provided, however, that in calculating the DPM’s allocation under the Algorithm, DPMs/
LMMs utilizing more than one membership in the trading crowd where the
subject class is traded shall count as two market participants for purposes
of Component A of the Algorithm; or
(2) the amount it would be entitled to pursuant to the participation right
established pursuant to Rule 8.87 and 8.15B (and Regulatory Circulars
issued thereunder); or
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(3) The amount it would be entitled to receive pursuant to the operation of
the Algorithm described above provided, however, that in calculating the
DPM’s or LMM’s allocation under the Algorithm, DPMs or LMMs utilizing
more than one membership in the trading crowd where the subject class
is traded shall count as two market participants for purposes of Component A of the Algorithm.
The appropriate Exchange procedures committee shall determine which
of the preceding two entitlement formulas will be in effect on a class-byclass basis. All pronouncements regarding the entitlement formula shall
be made via Regulatory Circular. The participation entitlement percentage is expressed as a percentage of the remaining quantity after all public customer orders in the electronic book have been executed.
(b) Allocation of Orders Represented in Open Outcry: The allocation of orders
that are represented in the trading crowd by floor brokers (including DPMs acting
as agent under 8.85(b)) shall be as described below in subparagraphs (b)(i) and
(b)(ii). With respect to subparagraph (b)(ii), the floor broker representing the order
(including DPMs acting as agent under 8.85(b)) shall determine the sequence in
which bids (offers) are made.
(i) Priority of Orders in the Electronic Book
(A) Public Customer Orders: Public customer orders in the electronic
book have priority. Multiple public customer orders in the electronic book
at the same price are ranked based on time priority. If a public customer
order(s) in the electronic book matches, or is matched by, an oral bid or
offer provided by a member of the trading crowd, the public customer
order(s) shall have priority and the balance of the order, if any, will be
allocated in open outcry in accordance with paragraph (B) below.
(B) Broker-Dealer Orders: If pursuant to Rule 7.4(a) the appropriate Exchange procedures committee determines to allow broker-dealer orders
to be placed in the electronic book, then for purposes of this rule, the
cumulative number of broker-dealer orders in the electronic book at the
best price shall be deemed one “book market participant” regardless of
the number of broker-dealer orders in the book. The allocation due the
broker-dealer orders in the electronic book by virtue of their being deemed
a “book market participant” shall be in accordance with paragraph (ii)
below and shall be distributed among each broker-dealer order comprising the “book market participant” in accordance with the Allocation Algorithm formula described in paragraph 6.45B(a)(ii)(B).
(ii) Allocation
(A) The highest bid (lowest offer) shall have priority.
(B) If two or more bids or offers represent the best price, each of which is
NOT a book market participant, priority shall be afforded in accordance
with the allocation principles contained in CBOE Rule 6.45(a) or (b) and
NOT Rule 6.45B(b).
If two or more bids (offers) represent the best price, one of which represents a book market participant, priority shall be afforded to the market
participants in the sequence in which their bids (offers) were made. ProRB24
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vided however that the first market participant to respond shall be entitled
to 70% of the order. The second market participant to respond (if
ascertainable) shall be entitled to 70% of the remainder of the order (i.e.,
70% of 30%). The balance of the order shall be apportioned equally among
the remaining market participants bidding (offering) at the same price and
the book market participant (as defined in Rule 6.45B(b)(ii)(2) above). If it
is not possible to determine the order in which market participants responded, the balance of the order shall be apportioned equally among the
remaining market participants bidding (offering) at the same price and, if
applicable, the book market participant.
In the event a market participant declines to accept any portion of the
available contracts, any remaining contracts shall be apportioned equally
among the other participants who bid (offered) at the best price (including
the book market participant, if applicable) at the time the market was
established until all contracts have been apportioned. The floor broker
representing the order (including DPMs acting as agent under 8.85(b)) shall
determine the sequence in which bids (offers) are made.
(iii) Exception: Complex Order Priority:
A member holding a spread, straddle, or combination 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) and bidding (offering) on a net debit or credit basis (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 electronic 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) Interaction of Market Participant’s Quotes and/or Orders with Orders in
Electronic Book
Market participants, as defined in Rule 6.45B, may submit quotes or orders electronically to trade with orders in the electronic book. A floor broker market participant may only represent as agent customer orders or orders from unaffiliated broker-dealers. When a market participant’s quote or order interacts with the order in
the book, a trade occurs, CBOE will disseminate a last sale report, and the size of
the book order will be decremented to reflect the execution.
In the limited instance when the appropriate Exchange procedures committee has
determined that the allocation of incoming electronic orders shall be pursuant to
price-time priority as described in Rule 6.45B(a)(i), allocation of orders in the Electronic Book pursuant to this paragraph shall be based on time-priority (i.e., allocated to the first market participant to interact with the order in the book, up to the
size of that market participant’s order). In all other instances, the allocation of the
book order shall be as follows:
(i) One Market Participant Trades with the Electronic Book: If only one market
participant submits an electronic order or quote to trade with an order in the electronic book, that market participant shall be entitled to receive an allocation of the
order in the electronic book up to the size of the market participant’s order.
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(ii) Multiple Market Participant Trade with the Electronic Book: Each market
participant that submits an order or quote to buy (sell) an order in the electronic
book within a period of time not to exceed 5-seconds of the first market participant to submit an order (“N-second group”) shall be entitled to receive an allocation of the order in the electronic book pursuant to the following allocation algorithm:
Allocation Algorithm
Electronic Book
Order(s) Size
*
(Equal percentage based on
number of members of
“N-second group”)
(Component A)
2
+
(Size pro-rata percentage
based on size of
orders of “N-second
group” members)
(Component B)
Where:
Component A: The percentage to be used for Component A shall be an equal
percentage derived by dividing 100 by the number of market participant’s in the
“N-second group.”
Component B: Size Prorata Allocation. The percentage to be used for Component B of the Allocation Algorithm formula is that percentage that each market
participant of the “N-second group’s” quote at the best price represents relative to
the total number of contracts of all market participants of the “N-second group.”
The appropriate Exchange procedures committee may determine that the maximum quote size to be used for each market participant in the Component B
calculation shall be no greater than the cumulative size of orders resident in the
electronic book at the best price at which market participants are attempting to
buy (sell).
Final Weighting: The final weighting formula, which shall be established by the
appropriate Exchange procedures committee and may vary by product, shall be a
weighted average of the percentages derived for Components A and B, multiplied
by the size of the order(s) in the electronic book. Changes made to the percentage weightings of Components A and B shall be announced to the membership
via Regulatory Circular at least one day before implementation of the change.
Length of “N-Second Group” Timer: The appropriate Exchange procedures
committee will determine the length of the “N-second group” timer on a class-byclass basis provided, however, that the duration of the “N-second group” timer
shall not exceed five seconds. Any changes to the duration of the “N-second
group” timer shall be announced via Regulatory Circular.
(iii) Participation Entitlement: There is no DPM or LMM participation entitlement applicable to orders allocated pursuant to this paragraph (c).
(d) Quotes Interacting with Quotes
(i) In the event that a Market-Maker’s disseminated quotes interact with the disseminated quote(s) of other Market-Makers, resulting in the dissemination of a
“locked” quote (e.g., $1.00 bid - 1.00 offer), the following shall occur:
(A) The Exchange will disseminate the locked market and both quotes will be
deemed “firm” disseminated market quotes.
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(B) The Market-Makers whose quotes are locked will receive a quote update notification advising that their quotes are locked, unless the “counting period” referenced
below is set to zero seconds.
(C) When the market locks, a “counting period” will begin during which MarketMakers whose quotes are locked may eliminate the locked market. Provided, however, that in accordance with subparagraph (A) above a Market-Maker will be obligated to execute customer and broker-dealer orders eligible for automatic execution pursuant to Rule 6.13 at his disseminated quote in accordance with Rule 8.51.
If at the end of the counting period the quotes remain locked, the locked quotes will
automatically execute against each other in accordance with the allocation algorithm described above in Rule 6.45B(a). The length of the counting period will be
established by the appropriate Exchange procedures committee, may vary by product, and will not exceed one second.
(ii) Inverted Quotes: The Hybrid System will not disseminate an internally crossed
market (i.e., the CBOE best bid is higher than the CBOE best offer). If a MarketMaker submits a quote (“incoming quote”) that would invert an existing quote (“existing quote”), the Hybrid System will change the incoming quote such that it locks
the first quote and send a notice to the second Market-Maker indicating that its
quote was changed. Locked markets are handled in accordance with paragraph
(d)(i) above. During the lock period, if the existing quote is cancelled subsequent to
the time the incoming quote is changed, the incoming quote will automatically be
restored to its original terms.
Interpretations and Policies . . .
.01 Principal Transactions: Order entry firms may not execute as principal against
orders they represent as agent unless: (i) agency orders are first exposed on the
Hybrid System for at least thirty (30) seconds, (ii) the order entry firm has been
bidding or offering for at least thirty (30) seconds prior to receiving an agency order
that is executable against such bid or offer, or (iii) the order entry firm proceeds in
accordance with the crossing rules contained in Rule 6.74.
.02 Solicitation Orders. Order entry firms must expose orders they represent as
agent for at least thirty (30) seconds before such orders may be executed electronically via the electronic execution mechanism of the Hybrid System, in whole or in
part, against orders solicited from members and non-member broker-dealers to
transact with such orders.
*******
Rule 8.14
Index Hybrid Trading System Classes: Market-Maker
Participants
(a) Generally: The Exchange procedures committee may authorize for trading on
the CBOE Hybrid Trading System or Hybrid 2.0 Program index options and options
on ETFs currently trading on the Exchange. The appropriate Exchange procedures
committee shall determine the eligible categories of Market-Maker participants for
option classes currently trading on the Exchange, which may include:
Designated Primary Market-Makers (“DPM”): Market-Makers as defined in Rule
8.80 whose activities are governed by, among other rules, CBOE Rules 8.80 –
8.91.
Lead Market-Makers (“LMM”): Market-Makers as defined in Rule 8.15A whose activities are governed by, among other rules, CBOE Rule 8.15A.
January 5, 2005, Volume RB16, Number 1
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Electronic DPMs (“e-DPM”): Market-Makers as defined in Rule 8.92 whose activities are governed by, among other rules, CBOE Rules 8.92 – 8.94.
Market-Makers: Market-Makers as defined in Rule 8.1 whose activities are governed by, among other rules, CBOE Rules 8.1- 8.11.
(b) Each class designated by the appropriate Exchange committee for trading on
Hybrid or the Hybrid 2.0 Platform shall have an assigned DPM or LMM. The
appropriate Exchange committee may determine to designate classes for trading
on Hybrid or the Hybrid 2.0 Platform without a DPM or LMM provided the following
conditions are satisfied:
1.
There are at least four (4) Market-Makers quoting in the class;
2.
Each Market-Maker with an appointment in the class is subject to the
continuous quoting obligations imposed by CBOE Rule 8.7(d);
3.
In the event CBOE activates request-for-quote (“RFQ”) functionality in
index classes, each MM will have an obligation to respond to that percentage of RFQs as determined by the appropriate Exchange procedures committee, provided however, that such percentage shall not be
less than 80%. Regarding RFQ responses:
4.
(i)
MMs must comply with the bid-ask differential contained in Rule
8.8(b)(iv):
(ii)
Responses must be submitted within the amount of time specified by the appropriate Exchange procedures committee from
the time the RFQ is entered.
(iii)
Responses must be for a minimum of ten contracts or a size
specified by the appropriate Exchange procedures committee,
whichever is greater.
(iv)
MMs responding to an RFQ must maintain a continuous market
in that series for a subsequent 30-second period (or for some
other time specified by the appropriate FPC) or until his/her quote
is filled in its entirety. A MM may change his quotes during this
30-second period but he may not cancel them without replacing
them. If the MM does cancel without replacing the quote his/her
response to the RFQ will not count toward the MM’s response
rate requirement set forth above. A MM will be considered to
have responded to the RFQ if he has a quote in the market for
the series at the time the RFQ is received and he maintains it for
the appropriate period of time.
Exchange has designated an entity responsible for complying with
Intermarket Linkage obligations in that particular class.
*****
Rule 8.15
Lead Market-Makers and Supplemental Market-Makers in
Non-Hybrid Classes
No change.
*****
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Rule Changes,
Interpretations and
Policies continued
SR-CBOE-2004-87 continued
Rule 8.15A
Lead Market-Makers in Hybrid Classes
(a) Assignment, Removal, and Evaluation of LMMs: The appropriate Market
Performance Committee (the “Committee”) may appoint one or more Market-Makers in good standing with an appointment in an option class for which a DPM has
not been appointed as Lead Market-Makers (“LMMs”).
(i) LMMs shall be appointed on the first day following an expiration for a period of no
less than one month (“expiration month”) and may be assigned to a class with one
or more LMMs.
A. Factors to be considered by the Committee in selecting LMMs include: adequacy of capital, experience in trading index options, presence in the trading crowd,
adherence to Exchange rules and ability to meet the obligations specified below.
An individual may be appointed as an LMM for one expiration month at a time.
When individual members are associated with one or more other members, only
one member may receive an LMM appointment.
B. Removal of LMMs may be effected by the Committee on the basis of the failure
of one or more LMMs assigned to the class to meet the obligations set forth below,
or any other applicable Exchange rule. An LMM removed under this rule may seek
review of that decision under Chapter XIX of the Rules.
C. If one or more LMMs are removed or if for any reason an LMM shall no longer be
eligible for or shall resign his appointment or shall fail to perform his duties, the
Committee may appoint an interim LMM to complete the monthly obligations of the
former LMM.
D. The Committee shall review and evaluate the conduct of LMMs, including but not
limited to compliance with Rules 8.1, 8.2, 8.3, and 8.7 and may hold all LMMs
responsible for the performance of each LMM in the class.
(b) LMM Obligations: LMMs are required to:
(i)
provide continuous market quotations that comply with the bid/ask differentials permitted by Rule 8.7(b) in 80% of the option series within their
assigned classes;
(ii)
assure that each of its displayed market quotations is honored for at least
the number of contracts prescribed pursuant to Rule 8.51;
(iii)
perform the above obligations for a period of one expiration month commencing on the first day following an expiration. Failure to perform such
obligations for such time may result in suspension of up to three months
from trading in all series of the option class;
(iv)
participate in the Hybrid Opening System; and
(v)
Respond to any open outcry request for quote by a floor broker with a twosided quote complying with the current quote width requirements of Rule
8.7(b)(iv) for a minimum of ten contracts for public customers and one
contract for non-public customers.
8.15B
Participation Entitlement of LMMs
(a) The appropriate Market Performance Committee may establish, on a class-byclass basis, a participation entitlement formula that is applicable to LMMs.
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Interpretations and
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SR-CBOE-2004-87 continued
(b) To be entitled to a participation entitlement, the LMM must be quoting at the
best bid/offer on the Exchange and the LMM may not be allocated a total quantity
greater than the quantity for which the LMM is quoting at the best bid/offer on the
Exchange. The participation entitlement is based on the number of contracts
remaining after all public customer orders in the book at the best bid/offer on the
Exchange have been satisfied.
(c) The LMM participation entitlement shall be: 50% when there is one MarketMaker also quoting at the best bid/offer on the Exchange; 40% when there are two
Market-Makers also quoting at the best bid/offer on the Exchange; and, 30%
when there are three or more Market-Makers also quoting at the best bid/offer on
the Exchange. If more than one LMM is entitled to a participation entitlement,
such entitlement shall be distributed equally among all eligible LMMs provided,
however, that an LMM may not be allocated a total quantity greater than the
quantity for which the LMM is quoting at the best bid/offer on the Exchange.
The appropriate Market Performance Committee may determine, on a class-byclass basis, to decrease the LMM participation entitlement percentages from the
percentages specified in paragraph (c). Such changes will be designated as a
stated policy, practice, or interpretation with respect to the administration of Rule
8.15B within the meaning of Section 19(b)(3)(A) and submitted to the SEC as
effective upon filing.
Disciplinary
Decisions
At its meeting on December 15, 2004, the Business Conduct Committee (“BCC”) resolved
the following disciplinary matter by accepting an Offer of Settlement in which the respondent consented to a stipulation of facts and findings as detailed below without admitting or
denying the Exchange Rules had been violated.
File No. 04-0027 (Offer of Settlement, Decision issued December 21, 2004)
Breakwater Trading, LLC (“Breakwater”), an Exchange Market-Maker organization, was
censured and fined $10,000 for the following conduct. During the approximate period from
in or about July 2003 through in or about December 2003, Breakwater failed to obtain Civil
Applicant Responses (“CARs”) for all of its associated persons. Additionally, during the
approximate period from in or about July 2003 through on or about April 27, 2004, Breakwater operated without a properly registered Financial and Operational Principal (“FINOP”).
Finally, since December 2003, Breakwater impeded and delayed the Exchange’s examination by its failure to respond timely to at least two written regulatory requests related to its
CARs in connection with the conduct described above1. (CBOE Rules 3.6A – Qualification
and Registration of Certain Associated Persons; 4.2 – Adherence to Law; 15.1 - Maintenance, Retention and Furnishing of Books, Records and Other Information; 17.2(b)- Complaint and Investigation: Requirement to Furnish Information; Section 17(a) of the Securities Exchange Act of 1924 as amended (the “Act”) and Rules 17a-3 – Records to be Made
by Certain Brokers and Dealers; 17a-4 – Records to be Preserved by Certain Brokers and
Dealers; and Section 17(f) and Rule 17f-2 – Fingerprinting of Securities Industry Personnel.)
1
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On December 16, 2004 the Exchange received the requested Civil Applicant Responses.
January 5, 2005, Volume RB16, Number 1