77790 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

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

2 17 CFR 240.19b–4.

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

4 17 CFR 240.19b–4(f)(6).

5 In Amendment No. 1, CBOE proposes to adopt 

new Interpretations and Policies .03 to Rule 6.25. 

The purpose of adopting this provision is to provide 

a definition of ‘‘erroneous buy’’ and ‘‘erroneous 

sell’’ transaction. Additionally, the Exchange 

proposes to capitalize the term ‘‘Theoretical Price’’

in the last sentence of proposed paragraph (a)(1) of 

CBOE Rule 6.25.

6 In Amendment No. 2, CBOE proposes to replace 

paragraph (c) of proposed CBOE Rule 24.16 and to 

make a technical correction to proposed paragraph 

(a)(1) of CBOE Rule 6.25 by replacing the word 

‘‘with’’ with the word ‘‘within.’’

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50880; File No. SR–CBOE–

2004–83] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change and 

Amendment Nos. 1 and 2 Thereto by 

the Chicago Board Options Exchange, 

Inc. To Amend Its Obvious Error Rule 

December 17, 2004. 

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

Securities Exchange Act of 1934 

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

notice is hereby given that on December 

9, 2004, 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 and II below, which Items have 

been prepared by the Exchange. The 

proposed rule change has been filed by 

CBOE as a ‘‘non-controversial’’ rule 

change pursuant to Section 19(b)(3)(A) 

of the Act 3 and Rule 19b–4(f)(6) 

thereunder.4 On December 13, 2004, 

CBOE submitted Amendment No. 1 to 

the proposed rule change.5 On 

December 16, 2004, CBOE submitted 

Amendment No. 2 to the proposed rule 

change.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 

CBOE proposes to amend its obvious 

error rule. Additions are italicized. 

Deletions are bracketed.

* * * * *

Rule 6.25 Nullification and 

Adjustment of [Electronic] Equity 

Options Transactions 

This Rule governs the nullification 

and adjustment of [options trades] 

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)[, (6), 

and (7)] 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: 

(1) Obvious Price Error: [An obvious 

pricing error will be deemed to have 

occurred when the execution price of a 

transaction is above or below the fair 

market value of the option by at least a 

prescribed amount. For series trading 

with normal bid-ask differentials as 

established in Rule 8.7(b)(iv), the 

prescribed amount shall be: (a) The 

greater of $0.10 or 10% for options 

trading under $2.50; (b) 10% for options 

trading at or above $2.50 and under $5; 

or (c) $0.50 for options trading at $5 or 

higher. For series trading with bid-ask 

differentials that are greater than the 

widths established in Rule 8.7(b)(iv), the 

prescribed error amount shall be: (a) 

The greater of $0.20 or 20% for options 

trading under $2.50; (b) 20% for options 

trading at or above $2.50 and under $5; 

or (c) $1.00 for options trading at $5 or 

higher. 

(i) Definition of Fair Market Value:

For purposes of this Rule only, the fair 

market value of an option is the 

midpoint of the national best bid and 

national best offer for the series (across 

all exchanges trading the option). In 

multiply listed issues, if there are no 

quotes for comparison purposes, fair 

market value shall be determined by 

Trading Officials. For singly-listed 

issues, fair market value shall be the 

first quote after the transaction(s) in 

question that does not reflect the 

erroneous transaction(s). For 

transactions occurring as part of the 

Rapid Opening System (‘‘ROS trades’’) 

or Hybrid Opening System (‘‘HOSS’’), 

fair market value shall be the first quote 

after the transaction(s) in question that 

does not reflect the erroneous 

transaction(s).] 

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 Minimum 

amount

Below $2 ................................... $0.25

$2 to $5 .................................... 0.40

Theoretical price Minimum 

amount

Above $5 to $10 ....................... 0.50

Above $10 to $20 ..................... 0.80

Above $20 ................................ 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) [Obvious Quantity Error: An 

obvious error in the quantity term will 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77791

be deemed to occur when the 

transaction size exceeds the responsible 

broker or dealer’s average disseminated 

size over the previous four hours by a 

factor of five (5) times. The quantity to 

which a transaction shall be adjusted 

from an obvious quantity error shall be 

the responsible broker or dealer’s 

average disseminated size over the 

previous four trading hours (which may 

include the previous trading day).] 

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

[Trades] arising out of a ‘‘verifiable 

disruption or malfunction’’ in the use or 

operation of any Exchange automated 

quotation, dissemination, execution, or 

communication system [may] 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.

(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 [adjusted 

or] nullified. In order to be [adjusted or] 

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 twominute 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). 

[(5) Erroneous Quote in Underlying: A 

trade resulting from an erroneous quote 

in the underlying security may be 

adjusted or nullified. An erroneous 

quote occurs when the underlying 

security has a width of at least $1.00 

and has a width at least five times 

greater than the average quote width for 

such underlying security on the primary 

market during the time period 

encompassing two minutes before and 

after the dissemination of such quote. 

(6) Trades Below Intrinsic Value: An 

obvious pricing error will be deemed to 

occur when the transaction price of an 

equity option is more than $0.10 below 

the intrinsic value of the same option 

(an option that trades at its intrinsic 

value is sometimes said to trade at 

‘‘parity’’). Paragraph (6) shall not apply 

to transactions occurring during the last 

two minutes of the trading day (which 

is typically 3:00:01 p.m. (CT) to 3:02 

p.m. (CT)) on days with regular trading 

hours). 

(i) Definition of Intrinsic Value: For 

purposes of this Rule, the intrinsic value 

of an equity call option equals the value 

of the underlying stock (measured from 

the bid or offer as described below) 

minus the strike price, and the intrinsic 

value of an equity put option equals the 

strike price minus the value of the 

underlying stock (measured from the 

bid or offer as described below), 

provided that in no case is the intrinsic 

value of an option less than zero. In the 

case of purchasing call options and 

selling put options, intrinsic value is 

measured by reference to the bid in the 

underlying security, and in the case of 

purchasing put options and selling call 

options, intrinsic value is measured by 

reference to the offer in the underlying 

security. 

(7) 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.] 

(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. [For 

transactions occurring after 2:45 p.m. 

(CST), notification must be provided 

promptly but not later than fifteen (15) 

minutes after the close of trading of that 

security on CBOE.] 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. [If the 

transaction(s) in question occurred after 

2:30 p.m., Trading Officials shall have 

until 9:30 a.m. the following morning to 

render a determination.] Trading 

Officials shall promptly provide verbal 

notification of a determination to the 

members involved in the disputed 

transaction and to the control room. 

[(c) Adjustments 

Unless otherwise specified in Rule 

6.25(a)(1)-(6), transactions will be 

adjusted provided the adjusted price 

does not violate the customer’s limit 

price. Otherwise, the transaction will be 

nullified. With respect to 6.25(a)(1)-(5), 

the price to which a transaction shall be 

adjusted shall be the National Best Bid 

(Offer) immediately following the 

erroneous transaction with respect to a 

sell (buy) order entered on the 

Exchange. For ROS or HOSS 

transactions, the price to which a 

transaction shall be adjusted shall be 

based on the first non-erroneous quote 

after the erroneous transaction on 

CBOE. With respect to 6.25(a)(6), the 

transaction shall be adjusted to a price 

that is $0.10 under parity.] 

(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.

77792 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

(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 nonerroneous 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.

* * * * *

Rule 24.16 Nullification and 

Adjustment of Index Option 

Transactions 

This Rule only governs the 

nullification and adjustment of 

transactions involving index options 

and options on ETFs or HLDRs. Rule 

6.25 governs the nullification and 

adjustment of transactions involving 

equity options. Paragraphs (a)(1), (2), (6) 

and (7) 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:

(1) Obvious Price Error: An obvious 

pricing error will be deemed to have 

occurred when the execution price of a 

transaction is above or below the fair 

market value of the option by at least a 

prescribed amount. For series trading 

with normal bid-ask differentials as 

established in Rule 8.7(b)(iv), the 

prescribed amount shall be: (a) the 

greater of $0.10 or 10% for options 

trading under $2.50; (b) 10% for options 

trading at or above $2.50 and under $5; 

or (c) $0.50 for options trading at $5 or 

higher. For series trading with bid-ask 

differentials that are greater than the 

widths established in Rule 8.7(b)(iv), the 

prescribed error amount shall be: (a) the 

greater of $0.20 or 20% for options 

trading under $2.50; (b) 20% for options 

trading at or above $2.50 and under $5; 

or (c) $1.00 for options trading at $5 or 

higher.

(i) Definition of Fair Market Value: 

For purposes of this Rule only, the fair 

market value of an option is the 

midpoint of the national best bid and 

national best offer for the series (across 

all exchanges trading the option). In 

multiply listed issues, if there are no 

quotes for comparison purposes, fair 

market value shall be determined by 

Trading Officials. For singly-listed 

issues, fair market value shall be the 

first quote after the transaction(s) in 

question that does not reflect the 

erroneous transaction(s). For 

transactions occurring as part of the 

Rapid Opening System (‘‘ROS trades’’) 

or Hybrid Opening System (‘‘HOSS’’), 

fair market value shall be the first quote 

after the transaction(s) in question that 

does not reflect the erroneous 

transaction(s).

(2) Obvious Quantity Error: An 

obvious error in the quantity term will 

be deemed to occur when the 

transaction size exceeds the responsible 

broker or dealer’s average disseminated 

size over the previous four hours by a 

factor of five (5) times. The quantity to 

which a transaction shall be adjusted 

from an obvious quantity error shall be 

the responsible broker or dealer’s 

average disseminated size over the 

previous four trading hours (which may 

include the previous trading day).

(3) Verifiable Disruptions or 

Malfunctions of Exchange Systems: 

Trades arising out of a ‘‘verifiable 

disruption or malfunction’’ in the use or 

operation of any Exchange automated 

quotation, dissemination, execution, or 

communication system may either be 

nullified or adjusted by Trading 

Officials.

(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 adjusted 

or nullified. In order to be adjusted or 

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 twominute 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.

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77793

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).

(5) Erroneous Quote in Underlying: A 

trade resulting from an erroneous quote 

in the underlying security may be 

adjusted or nullified. An erroneous 

quote occurs when the underlying 

security has a width of at least $1.00 

and has a width at least five times 

greater than the average quote width for 

such underlying security on the primary 

market during the time period 

encompassing two minutes before and 

after the dissemination of such quote.

(6) Trades Below Intrinsic Value: An 

obvious pricing error will be deemed to 

occur when the transaction price of an 

equity option is more than $0.10 below 

the intrinsic value of the same option 

(an option that trades at its intrinsic 

value is sometimes said to trade at 

‘‘parity’’). Paragraph (6) shall not apply 

to transactions occurring during the last 

two minutes of the trading day (which 

is typically 3:00:01 p.m. (CT) to 3:02 

p.m. (CT)) on days with regular trading 

hours).

(i) Definition of Intrinsic Value: For 

purposes of this Rule, the intrinsic value 

of an equity call option equals the value 

of the underlying stock (measured from 

the bid or offer as described below) 

minus the strike price, and the intrinsic 

value of an equity put option equals the 

strike price minus the value of the 

underlying stock (measured from the bid 

or offer as described below), provided 

that in no case is the intrinsic value of 

an option less than zero. In the case of 

purchasing call options and selling put 

options, intrinsic value is measured by 

reference to the bid in the underlying 

security, and in the case of purchasing 

put options and selling call options, 

intrinsic value is measured by reference 

to the offer in the underlying security.

(7) 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.

(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. For 

transactions occurring after 2:45 p.m. 

(CST), notification must be provided 

promptly but not later than fifteen (15) 

minutes after the close of trading of that 

security on CBOE. 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. If the 

transaction(s) in question occurred after 

2:30 p.m., Trading Officials shall have 

until 9:30 a.m. the following morning to 

render a determination. Trading 

Officials shall promptly provide verbal 

notification of a determination to the 

members involved in the disputed 

transaction and to the control room.

(c) Adjustments 

Unless otherwise specified in Rule 

24.16(a)(1)–(6), transactions will be 

adjusted provided the adjusted price 

does not violate the customer’s limit 

price. Otherwise, the transaction will be 

nullified. With respect to 24.16(a)(1)–(5), 

the price to which a transaction shall be 

adjusted shall be the National Best Bid 

(Offer) immediately following the 

erroneous transaction with respect to a 

sell (buy) order entered on the 

Exchange. For ROS or HOSS 

transactions, the price to which a 

transaction shall be adjusted shall be 

based on the first non-erroneous quote 

after the erroneous transaction on 

CBOE. With respect to 24.16(a)(6), the 

transaction shall be adjusted to a price 

that is $0.10 under parity.

(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 nonerroneous 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.

* * * * *

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

77794 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

7See proposed CBOE Rule 24.16, which is a 

identical in substance to current CBOE Rule 6.25, 

except that it is limited in application to index 

options and options on ETFs and HOLDRs.

8The Exchange proposes to use a similar 

definition for Theoretical Price as does the ISE. For 

multiply traded options, Theoretical Price will be 

the last bid (offer) price with respect to an 

erroneous sell (buy) transaction just prior to the 

trade that is disseminated by the competing options 

exchange with the most liquidity in that class over 

the preceding two calendar months. If there are no 

quotes for comparison purposes, trading officials 

shall determine 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).

9The requisite amount is: $0.25 for options below 

$2, $0.40 for options priced from $2 to $5, $0.50 

for options priced above $5 to $10, $0.80 for options 

priced above $10 to $20, and $1.00 for options 

priced above $20.

10 ISE also requires same-day determinations 

regardless of the time the transaction occurred. 

CBOE represents that trading officials will remain 

on Exchange premises until a determination is 

rendered.

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

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

the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange’s obvious error rule 

(CBOE Rule 6.25) establishes guidelines 

for the adjustment and nullification of 

transactions in both equity and index 

options. The Rule defines what 

constitutes an obvious error, provides 

an objective process members must 

follow to seek relief under the rule, and 

provides an appeals process for 

members seeking to challenge an initial 

determination. The Exchange’s Rule 

operates completely independent of the 

other options exchanges’ obvious error 

rules and is structured differently. In 

other words, transactions that might 

qualify as an obvious error on one 

options exchange might not qualify as 

such on CBOE, or vice versa. Because of 

this disparity and the potential for 

confusion, customers that routinely 

send orders to multiple exchanges have 

indicated that a more uniform obvious 

error pricing rule with respect to equity 

options would be beneficial to them. 

Accordingly, in response to the requests 

of its customers, CBOE proposes to 

adopt an obvious error pricing rule for 

equity options that is structured more 

like that of other options exchanges. The 

Exchange intends to keep its current 

obvious error for index options as well 

as options on ETFs and HOLDRS.7

a. Revised Rule CBOE 6.25, 

Nullification and Adjustment of Equity 

Options Transactions

Under CBOE’s current obvious error 

rule, there are seven types of 

transactions that qualify as obvious 

errors. The Exchange proposes to reduce 

this number to four, as described below. 

i. Obvious Price Errors

The Exchange proposes to adopt an 

obvious price error rule that operates 

almost identically to that of the 

International Securities Exchange 

(‘‘ISE’’) Rule 720, with minor 

differences. As such, an obvious pricing 

error will be deemed to have occurred 

when the execution price of an 

electronic transaction (not open outcry) 

varies from the Theoretical Price 8 by a 

requisite amount.9 When an obvious 

price error occurs, CBOE either will 

adjust or nullify the transaction in 

accordance with the following 

principles:

Transactions Between CBOE Market 

Makers (‘‘MMs’’): Transactions between 

CBOE MMs will be adjusted to the 

Theoretical Price plus/minus an 

‘‘adjustment penalty’’ of either $0.15 or 

$0.30. Erroneous buy transactions will 

be adjusted to Theoretical Price plus an 

adjustment penalty of either $0.15 if 

Theoretical Price is below $3 or $0.30 if 

the Theoretical Price is $3 or higher. 

Conversely, erroneous sell transactions 

will be adjusted to Theoretical Price 

minus an adjustment penalty of either 

$0.15 if Theoretical Price is below $3 or 

$0.30 if Theoretical Price is $3 or 

higher. Both parties to the transaction 

may agree to adjust to a different price 

or nullify the transaction altogether 

provided they do so within fifteen 

minutes of being notified by trading 

officials that an obvious error occurred. 

Transactions where One Party is not 

a CBOE MM: Where at least one party 

is not a CBOE MM, the transaction will 

be nullified by trading officials unless 

both parties agree to an adjustment price 

for the transaction within thirty minutes 

of being notified by trading officials of 

the obvious error. This is identical to 

the ISE Rule. 

ii. No Bid Series

This provision, which is identical to 

current paragraph (a)(7) of CBOE Rule 

6.25, is renumbered as paragraph (a)(2) 

of CBOE Rule 6.25. 

iii. Verifiable Disruptions or 

Malfunctions of Exchange Systems

This provision, which is identical to 

current paragraph (a)(3) of CBOE Rule 

6.25, will apply to transactions 

occurring electronically or in open 

outcry. For those transactions qualifying 

for adjustment, there will be no 

adjustment penalty. Accordingly, 

transactions between CBOE MMs will 

be adjusted to the Theoretical Price. 

Transactions involving at least one 

CBOE non-member will be nullified 

unless the parties otherwise agree. 

iv. Erroneous Print in Underlying

The Exchange proposes to amend 

paragraph (a)(4) of CBOE Rule 6.25 to 

clarify that a trade resulting from an 

erroneous print disseminated by the 

underlying market that is later cancelled 

or corrected by that underlying market 

may only be nullified. The current Rule 

allows these transactions to be adjusted 

or nullified. 

b. Current Provisions Proposed for 

Elimination

The Exchange proposes to eliminate 

current paragraphs (a)(2) (Obvious 

Quantity Error), (a)(5) (Erroneous Quote 

in Underlying), and (a)(6) (Trades Below 

Intrinsic Value) of CBOE Rule 6.25. 

Changes to the pricing error section, 

paragraph (a)(1) (Obvious Price Error), 

render these provisions unnecessary. 

c. Procedures for Reviewing 

Transactions

The Exchange retains its current 

procedures for reviewing transactions, 

with two minor modifications. First, the 

Exchange proposes to require 

notification within 15 minutes of the 

transaction in question, regardless of the 

time it occurred. Currently, for 

transactions occurring after 2:45 p.m. 

(CST), notification must be provided no 

later than fifteen (15) minutes after the 

close of trading of that security on 

CBOE. Second, the current Rule gives 

trading officials until 9:30 a.m. the 

following day to render determinations 

for transactions occurring after 2:30 p.m. 

Because this creates significant 

overnight exposure risk for both parties, 

the Exchange proposes to require 

trading officials to render a 

determination within 60 minutes of 

notification, regardless of the time the 

transaction occurred.10

Currently, the process for appealing 

determinations regarding obvious errors 

is governed by paragraph (d) of CBOE 

Rule 6.25, which provides for an 

appeals process under Chapter XIX of 

the Exchange’s rules. The Exchange 

proposes to amend this process and 

create an Obvious Error Panel that will 

review decisions rendered by trading 

officials. The rules creating and 

governing the Obvious Error Panel are 

substantially similar to ISE Rule 720. 

Regarding the composition of the panel, 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77795

11 15 U.S.C. 78(f)(b).

12 15 U.S.C. 78(f)(b)(5).

13 15 U.S.C. 78s(b)(3)(A).

14 17 CFR 240.19b–4(f)(6).

15See Securities Exchange Act Release No. 48097 

(June 26, 2003), 68 FR 39604 (July 2, 2003) 

(approving ISE’s obvious error rule).

16For purposes only of accelerating the operative 

date of this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 17 17 CFR 200.30–3(a)(12).

CBOE, in addition to including one 

Exchange trading floor liaison, will 

require that the panel be comprised of 

an equal number of CBOE MMs and 

floor broker members. However, while 

determinations rendered by ISE’s 

Obvious Error Panel constitute final 

exchange action, CBOE proposes to 

allow parties to appeal decisions of its 

Obvious Error Panel in accordance with 

the procedures set forth in Chapter XIX 

of CBOE’s rules. 

2. Statutory Basis 

CBOE represents that the filing 

provides objective guidelines for the 

nullification or adjustment of 

transactions executed at clearly 

erroneous prices. Moreover, the 

proposed rule provides more uniformity 

regarding obvious pricing errors, which 

will serve to benefit customers. For 

these reasons, the Exchange believes the 

proposed rule change is consistent with 

the Act and the rules and regulations 

under the Act applicable to a national 

securities exchange and, in particular, 

the requirements of section 6(b) of the 

Act.11 Specifically, the Exchange 

believes the proposed rule change is 

consistent with the requirements of 

Section 6(b)(5) of the Act 12 that the 

rules of an exchange be designed to 

promote just and equitable principles of 

trade, to prevent fraudulent and 

manipulative acts and practices, and, in 

general, to protect investors and the 

public interest.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

CBOE does not believe that the 

proposed rule change will impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the 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. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action

The foregoing proposed rule change 

(1) does not significantly affect the 

protection of investors or the public 

interest; (2) does not impose any 

significant burden on competition; and 

(3) by its terms, does not become 

operative until 30 days from the date on 

which it was filed, or such shorter time 

as the Commission may designate if 

consistent with the protection of 

investors and the public interest. 

Furthermore, the Exchange provided the 

Commission with written notice of its 

intent to file the proposed rule change, 

along with a brief description and text 

of the proposed rule change, at least five 

business days prior to the date of filing 

of the proposed rule change. 

Consequently, the proposed rule change 

has become effective pursuant to 

Section 19(b)(3)(A) of the Act 13 and 

Rule 19b–4(f)(6) thereunder.14

The Exchange has requested that the 

Commission waive the 30-day operative 

delay. The Commission believes that 

waiving the 30-day operative delay is 

consistent with the protection of 

investors and the public interest. The 

Commission notes that the proposal to 

amend CBOE’s obvious error rule 

provisions is substantially similar to 

provisions contained in ISE Rule 720,15

and incorporates certain aspects of 

current CBOE Rule 6.25, which the 

Commission previously approved. Thus, 

the Commission does not believe that 

the proposed rule change raises any new 

regulatory issues. In addition, the 

Commission believes that waiver of the 

30-day operative delay would enable the 

Exchange to implement the proposal as 

quickly as possible, and thereby provide 

for greater uniformity with respect to 

obvious error determinations for options 

transactions. For these reasons, the 

Commission designates the proposal to 

be effective and operative upon filing 

with the Commission.16

At any time within 60 days of the 

filing of this proposed rule change, the 

Commission may summarily abrogate 

such rule change if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as amended, is consistent with 

the Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2004–83 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609.

All submissions should refer to File 

Number SR–CBOE–2004–83. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for inspection and copying in 

the Commission’s Public Reference 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of CBOE. All comments received 

will be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–CBOE–

2004–83 and should be submitted on or 

before January 18, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.17

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–28276 Filed 12–27–04; 8:45 am] 

BILLING CODE 8010–01–P