5620 Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 

8 In approving this rule, the Commission notes 

that it has considered its impact on efficiency, 

competition, and capital formation. 15 U.S.C. 78c(f).

9 15 U.S.C. 78f(b).

10 15 U.S.C. 78f(b)(4).

11 15 U.S.C. 78s(b)(2).

12 Id.

13 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b-4.

3See letter from Stephen Youhn, CBOE, to Kelly 

Riley, Senior Special Counsel, Division of Market 

Regulation, Commission, dated January 6, 2004 

(‘‘Amendment No. 1’’). In Amendment No. 1, the 

CBOE proposed to limit its proposed rule change 

to 200 options classes trading on the CBOE’s Hybrid 

Trading System for a pilot period of six months. In 

addition, the CBOE agreed to provide the 

Commission with a pilot program report comparing 

the Average Quote Width Analysis (‘‘AQWA’’) 

scores for each pilot program option prior to the 

commencement of the pilot with the AQWA scores 

for each pilot program option during the pilot 

period. Finally, the CBOE amended Items 7 and 8 

of its Form 19b-4 to designate the filing as ‘‘noncontroversial’’ pursuant to Rule 19b-4(f)(6) and to 

indicate that its proposed rule change is 

substantially similar to an approved pilot program 

of the International Securities Exchange, Inc.

4 15 U.S.C. 78s(b)(3)(A).

5 17 CFR 240.19b-4(f)(6).

6For purposes of determining the effective date 

and abrogation date of this filing, the Commission 

considers January 7, 2004, the date on which the 

CBOE filed Amendment No. 1, to be the filing date 

of this proposed rule change.

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing will also be 

available for inspection and copying at 

the principal office of the Exchange. All 

submissions should be submitted by 

February 26, 2004. 

IV. Commission’s Findings and Order 

Granting Accelerated Approval of 

Proposed Rule Change 

After careful consideration, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder, applicable 

to a national securities exchange,8 and, 

in particular, with the requirements of 

section 6(b) of the Act 9 and the rules 

and regulations thereunder. The 

Commission finds that the proposed 

rule change is consistent with section 

6(b)(4) of the Act,10 which requires that 

the rules of the Exchange provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

members and other persons using its 

facilities. The Commission believes that 

the extension of the Exchange’s Linkage 

fee pilot program until July 31, 2004 

will give the Exchange and the 

Commission further opportunity to 

evaluate whether such fees are 

appropriate.

The Commission finds good cause, 

pursuant to section 19(b)(2) of the Act,11

for approving the proposed rule change 

prior to the thirtieth day after the date 

of publication of the notice of the filing 

thereof in the Federal Register. The 

Commission believes that granting 

accelerated approval will preserve the 

Exchange’s existing pilot program for 

Linkage fees without interruption as the 

Amex and the Commission further 

consider the appropriateness of Linkage 

fees.

V. Conclusion 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act,12 that the 

proposed rule change (SR–Amex–2004–

03) is hereby approved on an 

accelerated basis for a pilot period to 

expire on July 31, 2004.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.13

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 04–2358 Filed 2–4–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49153; File No. SR–CBOE–

2003–50] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change and 

Amendment No. 1 Thereto by the 

Chicago Board Options Exchange, 

Inc., Relating to a Pilot Program for 

Quotation Spreads in Hybrid Classes 

January 29, 2004. 

Pursuant to section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b-4 thereunder,2

notice is hereby given that on October 

31, 2003, the Chicago Board Options 

Exchange, Inc. (‘‘CBOE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by the Exchange. 

The CBOE submitted Amendment No. 1 

to the proposed rule change on January 

7, 2004.3 The CBOE has submitted the 

proposed rule change under section 

19(b)(3)(A) of the Act 4 and Rule 19b4(f)(6) thereunder,5 which renders the 

proposal effective upon filing with the 

Commission.6 The Commission is 

publishing this notice to solicit 

comments on the proposed rule change, 

as amended, from interested persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The CBOE proposes to amend CBOE 

Rule 8.7, ‘‘Obligations of Market 

Makers,’’ to adopt a six-month pilot 

program through June 29, 2004 that 

would permit quote spread parameters 

of up to $5 on up to 200 option classes 

traded on the CBOE’s Hybrid Trading 

System (‘‘Hybrid’’). The text of the 

proposed rule change appears below. 

Proposed new language is italicized.

Rule 8.7 Obligations of Market 

Makers 

(a) No change. 

(b) 

(i)–(iii) No change. 

(iv) To price options contracts fairly 

by, among other things, bidding and/or 

offering so as to create differences of no 

more than 0.25 between the bid and 

offer for each option contract for which 

the bid is less than $2, no more than 

$0.40 where the bid is at least $2 but 

does not exceed $5, no more than $0.50 

where the bid is more than $5 but does 

not exceed $10, no more than $0.80 

where the bid is more than $10 but does 

not exceed $20, and no more than $1 

where the bid is more than $20, 

provided that the appropriate Market 

Performance Committee may establish 

differences other than the above for one 

or more options series. The bid/ask 

differentials stated above shall not apply 

to in-the-money series where the 

underlying securities market is wider 

than the differentials set forth above. 

For these series, the bid/ask differential 

may be as wide as the quotation on the 

primary market of the underlying 

security. 

(A) For a six month period expiring 

on August 5, 2004, the Exchange may 

designate options on up to two hundred 

(200) underlying securities that may be 

quoted with a difference not to exceed 

$5 between the bid and offer regardless 

of the price of the bid. The $5 quote 

widths shall only apply to classes 

trading on the Hybrid system and only 

following the opening rotation in each 

security i.e., the widths specified in 

paragraph (b)(iv) above shall apply 

during opening rotation).

Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 5621

7The allowable bid-ask differentials are: $0.25 for 

options under $2, $0.40 for options between $2 and 

$5, $0.50 for options between $5 and $10, $0.80 for 

options between $10 and $20, and $1.00 for options 

above $20. See CBOE Rule 8.7(b)(iv). 8See Amendment No. 1, supra note 3.

9See Securities Exchange Act Release No. 47532 

(March 19, 2003), 68 FR 14728 (March 26, 2003) 

(order approving File No. SR-ISE–2001–15). 10See Securities Exchange Act Release No. 48514 

(September 22, 2003), 68 FR 55685 (September 26, 

2003) (notice of filing and immediate effectiveness 

of File No. SR-ISE–2003–21). 11See File No. SR–ISE–2003–22. 12 15 U.S.C. 78f(b). 13 15 U.S.C. 78f(b)(5).

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of the proposed rule 

change, as amended, is to establish a 

six-month pilot program to relax the 

quotation spread requirements on the 

CBOE for up to 200 option classes 

traded on Hybrid. Currently, CBOE Rule 

8.7(b)(iv) establishes maximum bid-ask 

differentials (also referred to as quote 

spread requirements) that vary from 

$0.25 to $1.00, depending upon the 

price of the option.7 The primary 

purpose of the quote spread 

requirements is to help to maintain 

narrow spreads in options. According to 

the CBOE, these requirements can have 

the unintended consequence of 

requiring market makers to quote at 

prices that are unnecessarily narrow, 

thereby exposing them to great risk if 

markets move quickly.

The CBOE believes that given the 

competitive market making structure of 

Hybrid and the existence of vigorous 

inter-market competition, the 

mandatory quote spread requirements 

may not be necessary to ensure narrow 

and competitive spreads in options. In 

this regard, the CBOE states that the 

Hybrid market structure creates strong 

incentives for competing market makers 

and other market participants to 

disseminate competitive prices. The 

Exchange notes that in Hybrid each 

market maker quotes independently, 

and customers and broker-dealers can 

enter limit orders in the limit order book 

at prices better than those posted by 

market makers. The Exchange 

automatically collects this trading 

interest information, calculates the 

CBOE best bid and offer, and 

disseminates that value to the Options 

Price Reporting Authority. Accordingly, 

the CBOE believes that its Hybrid 

market is competitive, accessible and 

transparent. 

In addition, the CBOE states that 

market participants in Hybrid have 

strong incentives to quote 

competitively. The CBOE allocates 

incoming orders based on the price and 

size of orders and quotes resting in the 

book. Under the CBOE’s Ultimate 

Matching Algorithm (‘‘UMA’’), the 

larger the size of a market maker’s quote 

at the best price, the greater the size of 

the allocation he or she receives. 

Conversely, if a market participant does 

not quote at the best price, the market 

participant will not participate in any 

electronic trade allocations. The CBOE 

believes, moreover, that given NBBO 

protections in place at each exchange as 

well as through the Options Market 

Linkage plan, market participants have 

even stronger incentives to quote at the 

best price, lest incoming orders be filled 

away. Thus, the CBOE believes that 

inter- and intra-market competitive 

forces provide strong incentives for 

market participants to quote 

competitively and enter quotes and 

orders that improve the price and depth 

of the market.

For these reasons, CBOE proposes a 

pilot program to expand the allowable 

spread in Hybrid classes to $5 for up to 

200 classes of options traded on Hybrid. 

The proposed quote spread 

requirements will apply after the 

opening trading rotation. During the 

opening trading rotation, market makers 

will be required to quote in accordance 

with the traditional bid-ask width 

requirements. The $5 quotation 

requirements would become operative 

immediately following the opening 

rotation. Non-Hybrid classes will 

remain subject to the current 

requirements of CBOE Rule 8.7(b)(iv). 

During the pilot program, the CBOE 

will monitor the quotation quality of all 

classes in the program and, based on the 

results, recommend either relaxing the 

spread requirements for all Hybrid 

classes, ending the pilot, or adjusting 

the spread requirements for all Hybrid 

classes. Immediately following the pilot 

period, the Exchange will prepare and 

submit to the Commission a report 

assessing the operation of the program 

and, in particular, the quality of the 

quotations for the pilot options.8 In this 

respect, the CBOE commits to provide to 

the Commission a report analyzing 

Average Quote Width Analysis 

(‘‘AQWA’’) scores for each of the pilot 

stocks. The Exchange’s report will 

compare the AQWA scores for each 

option prior to implementation of the 

pilot program versus the AQWA scores 

for each option during the pilot period. 

The Exchange believes that this 

information will provide a meaningful 

comparison during these relevant 

periods so that the Exchange may 

determine the effect that $5 quote 

widths have on quote quality.

The CBOE notes that the proposed 

quotation spread requirements are in 

effect on a pilot basis at the 

International Securities Exchange, Inc. 

(‘‘ISE’’). Specifically, on March 19, 

2003, the Commission approved a sixmonth pilot program (‘‘ISE Pilot’’) 

permitting ISE market makers to expand 

the allowable spread in their quotations 

to $5.9 The ISE Pilot applies to options 

on 50 underlying stocks and expires on 

January 31, 2004.10 In September 2003, 

the ISE requested permanent approval 

of the ISE Pilot and sought to expand 

the terms of the ISE Pilot to all ISElisted equity options.11 The CBOE 

represents that its proposed pilot 

program is similar to that of the ISE.

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with the Act 

and the rules and regulations under the 

Act applicable to a national securities 

exchange and, in particular, the 

requirements of section 6(b) of the 

Act.12 Specifically, the Exchange 

believes the proposed rule change is 

consistent with the section 6(b)(5) 13

requirements that the rules of an 

exchange be designed to promote just 

and equitable principles of trade, to 

prevent fraudulent and manipulative 

acts and, in general, to protect investors 

and the public interest.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The CBOE does not believe that the 

proposed rule change will impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

No written comments were solicited 

or received.

5622 Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 

14See supra note 6.

15 15 U.S.C. 78s(b)(3)(A).

16 17 CFR 240.19b–4(f)(6).

17For purposes only of accelerating the operative 

date of this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f).

18See supra notes 8 and 9, and accompanying 

text.

19See supra note 6.

20 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 48463 

(Sept. 9, 2003), 68 FR 54761.

3EMCC Rule 2 (Members), sec. 10 (Inactive 

Status); EMCC Rule 1 (Definitions).

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The CBOE has filed 14 the proposed 

rule change pursuant to section 

19(b)(3)(A) of the Act 15 and 

subparagraph (f)(6) of Rule 19b–4 

thereunder.16 Because the foregoing 

proposed rule change: (1) Does not 

significantly affect the protection of 

investors or the public interest; (2) does 

not impose any significant burden on 

competition; and (3) is not proposed to 

become operative for 30 days, or such 

shorter time as the Commission may 

designate, and the CBOE provided the 

Commission with written notice of its 

intent to file the proposed rule change 

at least five business days prior to the 

filing date, the proposed rule change has 

become effective pursuant to section 

19(b)(3)(A) of the Act and Rule 19b–

4(f)(6) thereunder.

A proposed rule change filed under 

Rule 19b–4(f)(6) normally does not 

become operative prior to 30 days after 

the date of filing. However, Rule 19b–

4(f)(6)(iii) permits the Commission to 

designate a shorter time if such action 

is consistent with the protection of 

investors and the public interest. The 

CBOE has requested that the 

Commission waive the 30-day operative 

delay to allow the CBOE to implement 

its pilot program, which is similar to the 

ISE Pilot, without delay. 

The Commission believes that 

waiving the 30-day operative delay is 

consistent with the protection of 

investors and the public interest.17

Specifically, the Commission believes 

that allowing the CBOE to establish a 

pilot program that is similar to the ISE 

Pilot will help the CBOE to compete 

with the ISE. In addition, the 

Commission notes that the CBOE’s pilot 

program is substantially similar to the 

ISE Pilot, which the Commission 

approved previously on a six-month 

pilot basis and subsequently extended 

through January 31, 2004.18 The 

Commission believes that the CBOE’s 

proposal raises no new issues or 

regulatory concerns that the 

Commission did not consider in 

approving the ISE Pilot. For these 

reasons, the Commission designates that 

the proposal become operative 

immediately, with the pilot program to 

extend through June 29, 2004.

At any time within 60 days of the 

filing of such proposed rule change,19

the Commission may summarily 

abrogate such rule change if it appears 

to the Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act.

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as amended, is consistent with 

the Act. Persons making written 

submissions should file six copies 

thereof with the Secretary, Securities 

and Exchange Commission, 450 Fifth 

Street, NW., Washington, DC 20549–

0609. Comments may also be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

SR–CBOE–2003–50. This file number 

should be included on the subject line 

if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, your 

comments should be sent in hardcopy 

or by e-mail but not by both methods. 

Copies of the submission, all 

subsequent amendments, all written 

statements with respect to the proposed 

rule change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing will also be available for 

inspection and copying at the principal 

office of the CBOE. All submissions 

should refer to File No. SR–CBOE–

2003–50 and should be submitted by 

February 26 2004.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.20

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. 04–2359 Filed 2–4–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49150; File No. SR–EMCC–

2003–04] 

Self-Regulatory Organizations; 

Emerging Markets Clearing 

Corporation; Order Approving a 

Proposed Rule Change Creating an 

Inactive Member Category 

January 29, 2004. 

On August 7, 2003, the Emerging 

Markets Clearing Corporation (‘‘EMCC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) a 

proposed rule change pursuant to 

section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 (File No. 

SR–EMCC–2003–04). Notice of the 

proposal was published in the Federal 

Register on September 18, 2003.2 No 

comment letters were received. For the 

reasons discussed below, the 

Commission is approving the proposed 

rule change.

I. Description 

The proposed rule change will create 

a new membership category for inactive 

members. From time to time, 

participants find that their activity level 

in EMCC-cleared instruments does not 

warrant active membership status and 

the costs and risks associated with such 

status. At the same time, however, they 

are reluctant to terminate their 

membership because of the amount of 

time, effort, and cost that would be 

required to provide EMCC with the 

membership documents required to 

regain their membership status should 

they later choose to take advantage of 

EMCC’s services. To accommodate this 

need, EMCC proposes to add to its rules 

a new section for ‘‘inactive status’’ and 

a new definition for the term ‘‘inactive 

member.’’ 3

In order to be eligible to be an inactive 

member, the participant must have no 

pending or fail positions and no unpaid 

money obligations. After a participant 

requests that it be placed in inactive 

status, management will act upon its 

request. Management’s decision to grant 

a participant’s request for inactive status 

will not require approval by EMCC’s 

Membership and Risk Management 

Committee, but this committee will be 

notified. 

A participant that requests to be 

placed on inactive status will be entitled 

to a refund of its clearing fund deposit