Exchange and Regulatory Bulletin - Cboe Financial Access LLC 128 Hutchins St. Woodstock, ......

ExchangeBulletin

December 31, 2004 Volume 32, Number 54The Constitution and Rules of the Chicago Options Exchange, Incorporated (“Exchange”), in certain specific instances, requirethe Exchange to provide notice to the Exchange membership. To satisfy this requirement, a complimentary copy of the Ex-change 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-mailsubscriptions may be obtained by submitting your name, firm, mailing address, e-mail address, and phone number, [email protected], or, by contacting the Membership Department by phone, at 312-786-7449. There is no charge for e-maildelivery of the Exchange and Regulatory Bulletin or for Information Circulars. If you do sign up for e-mail delivery, pleaseremember 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 ad-dress and telephone number to: Chicago Board Options Exchange, Accounting Department, 400 South LaSalle, Chicago, Illi-nois 60605, Attention: Bulletin Subscriptions. The cost of an annual subscription (July 1 through June 30) is $200.00 ($100.00after 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. Foraccess to the CBOE Member Web Site, please also notify the Membership Department using the contact information above.

Copyright © 2004 Chicago Board Options Exchange, Incorporated

CLASS BID OFFER LAST SALE AMOUNT LAST SALE DATECBOE/FULL $265,000.00 $300,000.00 $270,000.00 December 29, 2004CBOT/FULL $1,200,000.00 $1,375,000.00 $1,340,000.00 December 27, 2004

SEAT MARKET QUOTES AS OF FRIDAY, DECEMBER 31, 2004

MEMBERSHIP SALES AND TRANSFERSFrom To Price/Transfer DateVan der Moolen Options USA LLC Arclight Securities, LLC $270,000.00 12/29/2004

MEMBERSHIP APPLICATIONS RECEIVED FORWHICH A POSTING PERIOD IS REQUIRED

Individual Membership Applicants Date Posted

Daniel D. Mulvihill Jr., Nominee 12/23/04Robert C. Sheehan & Associates, LLC665 Greenbay Rd.Highland Park, IL 60035

Jeffrey Schneider, CBT Registered For 12/23/04Third Millennium Trading LLC723 Noble StreetChicago, IL 60622

Luke C. Mraz, Nominee 12/27/04Ronin Capital, LLC2954 N. Racine, 2FChicago, IL 60657

Robert J. Leone, Nominee 12/27/04Cutler Group, LP1241 W. LillChicago, IL 60614

Brandon S. Koress, Nominee 12/27/04Cornerstone Partners2265 Birchwood LaneNorthfield, IL 60093

Lincoln W. Brewer, Nominee 12/29/04Right Side Trading LLC8 Seneca Ct.Burr Ridge, IL 60521

Eric J. Wiejak, Nominee 12/29/04TJM Investments, LLC303 W. Madison, Ste. 400Chicago, IL 60606

Member Organization Applicants Date Posted

Cygnus Atratus Capital, LLC 12/27/04Timothy A. Kirchner, Nominee30 South Wacker, Ste. 2009Chicago, IL 60606

Timothy A. Kirchner – MemberCynthia Francque - Member

Blue Capital Asset Management LLC 12/27/04Lorry A. Lichtenstein, Nominee790 Estate Drive, Ste. #250Deerfield, IL 60015

Blue Capital Holdings LLC - Managing MemberCrescent Court Corp. – MemberLorry Lichtenstein – ShareholderFavia Inc. – MemberJohn Favia – ShareholderPinhurst Trading Corp. – MemberJohn T. Colvin – ShareholderLorry Lichtenstein – CEOBrian Casper - CCO

MEMBERSHIP INFORMATION FOR 12/23/04 THROUGH 12/29/04Date Posted

Page 2 December 31, 2004 Volume 32, Number 54 Chicago Board Options Exchange

Jefferies Options Execution, LLC 12/27/04D/B/A JOE, LLC141 W. Jackson Blvd., Ste. 500Chicago, IL 60604

Jefferies & Company Inc. – MemberJefferies Group Inc. - Holding CompanyPEAK6 Investments LP – MemberPEAK6 LLC - General PartnerMatthew Hulsizer – Member

Jennifer Just – MemberMatthew Hulsizer – ManagerAnthony M. Sanfilippo - Manager

Baxter Trading LLC 12/27/04Robert Baxter, CBT Registered For440 S. LaSalle, Ste. #1822Chicago, IL 60605

Geneva LLC - Managing MemberGary R. Silverman - Chairman of the ManagingMemberDaniel C. Williams - President of the Managing Member

MEMBERSHIP LEASES

New Leases Effective Date

Lessor: G-Bar Limited Partnership 12/27/04Lessee: AB Financial LLC

Thomas P. Tiernan, NOMINEERate: .875% Term: 1 Month

Lessor: Jules Sobel 12/27/04Lessee: Susquehanna Investment Group

Brian W. Hansen, NOMINEERate: .875% Term: Monthly

Lessor: Richard B. Konz 12/29/04Lessee: Infinium Capital Management, LLC

Douglas S. Komen, NOMINEERate: .875% Term: Monthly

Terminated Leases Termination Date

Lessor: Victor Grevious 12/27/04Lessee: AB Financial LLC

Thomas P. Tiernan (TJT), NOMINEE

MEMBERSHIP TERMINATIONS

Individual Members

CBT Registered For: Termination Date

Joseph G. Kinahan (JJJ) 12/27/04Van der Moolen Options USA LLC323 PhillippaHinsdale, IL 60521

Todd A. Koster (TKA) 12/27/04Van der Moolen Options USA LLC9410 41st Ave.Pleasant Prairie, WI 53158

Scott D. Force (SKT) 12/28/04Cornerstone Partners440 S. LaSalle - Ste. 2500Chicago, IL 60605

Filip Jakub Duszczyk (FXD) 12/29/04Infinium Capital Management, LLC141 W. Jackson Blvd., Ste. 1520Chicago, IL 60604

Lessor(s): Termination Date

Victor Grevious 12/27/041 East Delaware Pl. - Apt. 8JChicago, IL 60611

Nominee(s) / Inactive Nominee(s): Termination Date

Kenneth E. Kwalik (KLK) 12/29/04SLK-Hull Derivatives LLC440 S. LaSalle Street, 3rd FloorChicago, IL 60605

EFFECTIVE MEMBERSHIPS

Individual Members

Nominee(s) / Inactive Nominee(s): Effective Date

James A. Massey Jr. (MSS) 12/23/04ROQ Capital, LLC440 S. LaSalle - 28th FloorChicago, IL 60605Type of Business to be Conducted: Market Maker

John R. Knuth (HOG) 12/23/04X-Change Financial Access LLC128 Hutchins St.Woodstock, IL 60098Type of Business to be Conducted: Floor Broker

Geoffrey D. Fahy (FHY) 12/23/04Susquehanna Investment Group175 W. Jackson Blvd., Ste. 1700Chicago, IL 60604Type of Business to be Conducted: Market Maker/Floor Broker

Gary R. Silverman (GYS) 12/27/04Vitale Trading LLC440 S. LaSalle - Ste. 1822Chicago, IL 60605Type of Business to be Conducted: Market Maker

Ioannis S. Moraitis (YNI) 12/28/04SMC Option Management LLC440 S. LaSalle, 19th FloorChicago, IL 60605Type of Business to be Conducted: Market Maker

Douglas S. Komen (KUG) 12/29/04Infinium Capital Management, LLC141 W. Jackson, Ste. 1520Chicago, IL 60604Type of Business to be Conducted: Market Maker/Floor Broker

JOINT ACCOUNTS

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

Date Posted


Adrian Velazquez QHO 12/23/04

James A. Massey Jr. QXL 12/23/04

James A. Massey Jr. QOQ 12/23/04

Geoffrey D. Fahy QGS 12/23/04

Brian W. Hansen QUT 12/27/04

Brady W. Barth QBK 12/27/04

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 12/28/04From: Nominee For PEAK6 Capital Management LLC; No

Floor FunctionsTo: Nominee For PEAK6 Capital Management LLC; Market

Maker

Brian W. Hansen 12/27/04From: Nominee For Van der Moolen Options U.S.A. LLC;

Market Maker/Floor BrokerTo: Nominee For Susquehanna Investment Group; Market

Maker/Floor Broker

Member Organizations Effective Date

Infinium Capital Management LLC 12/29/04From: Member Organization Affiliated with a CBT Registered

For; Associated with a Market MakerTo: Lessee; Associated with a Market Maker/Floor Broker

G-Bar Limited Partnership 12/27/04From: Lessee/Member Organization Affiliated with a CBT

Registered For; Associated with a Market Maker/FloorBroker

To: Lessor/Lessee/Member Organization Affiliated with aCBT Registered For; Associated with a Market Maker/Floor Broker

MEMBER ADDRESS CHANGES

Individual Members Effective Date

Erik A. MacKay 12/27/04872 Bristol LaneNew Lenox, IL 60451

Adam C. Metzger 12/28/04440 S. LaSalle St., Ste. 1546Chicago, IL 60605

Garett J. Nesbitt 12/28/04440 S. LaSalle - Ste. 950Chicago, IL 60605

Joseph A. El-Etr 12/29/04209 S. LaSalle, 10th FloorChicago, IL 60604

Member Organizations Effective Date

PEAK6 Capital Management LLC 12/23/04141 W. Jackson Blvd., Suite 500Chicago, IL 60604

Effective DateNew Participants Acronym Effective Date


RESEARCH CIRCULARSThe 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 availablein the Trading Tools section of the website. For questions regarding information discussed in a Research Circular, please call The OptionsClearing Corporation at 1-888-OPTIONS.

Research Circular #RS04-713December 23, 2004Mobile TeleSystems OJSC (“MBT”)4-for-1 ADS SplitEx-Distribution Date: January 3, 2005

Research Circular #RS04-714December 23, 2004Meritage Homes Corporation (“MTH”)2-for-1 Stock SplitEx-Distribution Date: January 10, 2005

Research Circular #RS04-715December 23, 2004*****UPDATE*****iSharesSM S&P 100® Index Fund(“IOE/OEM/OEG/OEF/OHW”)Special Cash DistributionEx-Distribution Date: December 27, 2004

Research Circular #RS04-716December 23, 2004*****UPDATE*****iSharesSM Goldman Sach Software Index Fund (“IGV”)Special Cash DistributionEx-Distribution Date: December 27, 2004

Research Circular #RS04-717December 23, 2004*****UPDATE*****iSharesSM Goldman Sach Technology Index Fund (“IGM”)Special Cash DistributionEx-Distribution Date: December 27, 2004

Research Circular #RS04-718December 27, 2004*****REVISED*****iSharesSM S&P 100® Index Fund(“IOE/OEM/OEG/OEK/OEF/OHW”)Special Cash DistributionEx-Distribution Date: December 27, 2004

Research Circular #RS04-720December 29, 2004PeopleSoft, Inc. (“PSFT/PQO/WOZ/VOP”)Tender Offer FURTHER EXTENDED byPepper Acquisition Corp.

RegulatoryBulletin

January 5, 2005 Volume RB16, Number 1The Constitution and Rules of the Chicago Board Options Exchange, Incorporated(“Exchange”), in certain specific instances, require the Exchange to provide notice to the mem-bership. The weekly Regulatory Bulletin is delivered to all effective members to satisfy thisrequirement.Copyright © 2004 Chicago Board Options Exchange, Incorporated

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 Robert Gardner (312) 786-7937Contacts: 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 ExchangeCommission (“SEC”) to allow short sales of a limited number of stockswithout regard to any price test has been reset to May 2, 2005. The pilotwas originally set to commence on January 3, 2005, the compliance datefor 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 ex-change via an internet website. In the event that a threshold security isdually listed, it will be included only on the threshold security list of theSRO that is the primary listing exchange. These lists will be available in adownloadable file.

• The SROs will make every effort to have their respective threshold secu-rities list available by 12 AM EST each business day.

• Threshold securities lists may be found at the following URLs:

New York Stock ExchangeHTML – www.nyse.com/thresholdText File – www.nyse.com/threshold/NYSEthYYYYMMDD.txt

1Reg. 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.

RegulatoryCirculars

RB2 January 5, 2005, Volume RB16, Number 1

Regulatory Circularscontinued

NASDAQ2

HTML – www.nasdaqtrader.com/asp/regsho.aspText File–www.nasdaqtrader.com/dynamic/SymDir/nasdaqthyyyymmdd.txt.txtText File- ftp://ftp.nasdaqtrader.com/Symboldirectory/RegSHO

American Stock ExchangeText File –ftp://ftp.amex.com/amextrader/tradingData/data/RegSHO/Daily/AMEXTHccyymmdd.txt

Chicago Stock ExchangeText File - ftp://ftp3.chx.com/regsho/

ARCA / EXwww.archipelago.com (A specific URL extension was not available atthe time of publication.)

• Some of the above websites may not be operational, or contain a thresh-old securities file, at the time this Regulatory Circular is published. How-ever, each exchange expects to have its website operational, with a testfile, prior to January 3, 2005.

• The Boston Stock Exchange, Philadelphia Stock Exchange and NationalStock Exchange are not the primary listing exchange for any securitiesat this time and will not be publishing a threshold securities list.

• Note that text files are dated. The threshold securities list for a given dayis 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 inthe 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 ThresholdFlag|Filler|Filler. (Example: ZZYX|Anyname Inc.|NNM|Y||. NNM denotesNASDAQ National Market.)

DISCUSSION

On November 30, 2004, the SEC approved a delay in the start of a pilot program that willsuspend all short sale price tests for a limited number of stocks. The pilot period wasoriginally 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 RegulationSHO.

“Threshold securities” are generally defined in Regulation SHO as equity securitiesregistered 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 forfive consecutive settlement days of 10,000 shares or more and that is equal to at least0.5% of the issue’s total shares outstanding; and (2) are included on a list disseminated bya self-regulatory organization.

Regulatory Circular RG04-127 continued

2Including small cap, OTCBB and other OTC issues.3For 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

January 5, 2005, Volume RB16, Number 1 RB3


Under Rule 203, paragraph (b)(3), of Regulation SHO, a clearing broker-dealer is required toclose-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 businessdays or settlement date plus 10 business days) by immediately purchasing securities of likekind and quantity. Until the close-out is executed, the clearing broker-dealer and any broker-dealer for which it clears, including a Market-Maker, is prohibited from effecting furthershort sales in the subject threshold security, unless, prior to a new short sale, the security isborrowed 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 thresholdsecurities listed on its respective market, or for which the SRO bears the primary surveil-lance responsibility. The stock exchanges have determined to disseminate lists of thresholdsecurities via their internet websites. In the event that a threshold security is traded on morethan one exchange, it will appear only on the threshold securities list of the exchange that isthe primary listing exchange. The exchanges will make every effort to make thresholdsecurities lists available by 12:00 AM EST each business day. Downloadable text files in apipe-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 fiveday look back.

Questions concerning Regulation SHO may be directed to Richard Lewandowski, (312) 786-7183, or Robert Gardner, (312) 786-7937, in the Exchange’s Department of Financial andSales Practice Compliance.



To: Members

From: CBOE

Re: Wireless Systems in the Trading Crowds

The Exchange has recently become aware that members are using wireless routers oncomputer and communication systems (“System”) located on the Exchange floor that havenot been approved by the Exchange. The Exchange is reminding all members that comple-tion of a Communication/Computer System Application and Agreement is required prior tothe installation and use of a System on the Exchange floor. In addition, members mustcomplete a Communication/Computer System Application and Agreement for a materialchange to the functionality or the proposed use of a System that has already been approvedby the Exchange. Members who are using Systems in the trading crowds and who have notsubmitted a Communication/Computer System Application and Agreement to the Exchangefor such Systems must submit an agreement to the Telecommunications Department.

Completion of Communication/Computer System Application and Agreements by Exchangemembers is essential to ensure that use of the System does not jeopardize the integrity andproper functioning of other members’ Systems, as well as the Exchange’s proprietary sys-tems. Exchange review of the Communication/Computer System Application and Agree-


4There is a limited exception for options Market-Makers. If the short sale of a threshold security iseffected to establish or maintain a hedge on option positions that were opened before the securitybecame a threshold security, neither the close-out requirement nor the pre-borrow requirement for a newshort sale are applicable.



ments also allows the Exchange to determine the proper radio frequency or frequenciesand radio frequency capacities that should be allocated to the member’s System.

Communication/Computer System Application and Agreements are available at the Tele-communications Service Center, 4th Floor. Please contact 786-7611 for further assis-tance. Any questions regarding this circular may be directed to Fred Mondt of the Telecom-munications Service Department at 786-7228.



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 advisesits membership that it is a violation of Just & Equitable Principles of Trade and is inconsis-tent with the Responsibilities of Floor Brokers for any member operating a PAR (or anyagency workstation or order book) to disclose specific order information to the tradingcrowd or to any other party prior to such order being represented in open outcry. Suchdisclosure would provide an inappropriate informational advantage and could result in otherrules violations if, for instance, the disclosure allowed members to back away from theirquotes.

Similarly, it is a violation of Just & Equitable Principles of Trade and Market-Maker Obliga-tions for any member of the trading crowd trading as a Market-Maker to gain inappropriateknowledge of orders by, for example, reading a Floor Broker’s PAR screen, and to act onthat material non-public knowledge by modifying his or her market quotes.

As such, the Exchange advises Floor Brokers operating PAR terminals to take the neces-sary measures to ensure that specific order information is not disclosed to the tradingcrowd or to any other party prior to the order being represented in open outcry. Suchmeasures may include the use of a PAR screen filter or repositioning the PAR screen awayfrom the direct view of the trading crowd.

Members who require a PAR screen filter or need to have a PAR terminal repositionedshould contact Trading Operations via the Help Desk at (312) 786-7100. PAR screen filterswill be provided to members at no cost, however, members shall be responsible for anycosts associated with the damage, repair, or replacement of this equipment.

Questions concerning this circular may be directed to Karen Calvin at (312) 786-7759 orTrading Floor Liaison staff at (312) 786-4068.




To: Members

From: Legal Division


Re: New Obvious Error Rule for Equities

Effective immediately, CBOE is implementing a new obvious error rule applicable toequity options transactions only. Index options and options on ETFs will continue tobe governed by the existing obvious error rule, which is being renumbered as Rule24.16. This means the CBOE will have two obvious error rules: Rule 6.25 for equityoptions transactions and Rule 24.16 for transactions in index options and options onETFs. The new obvious error rule is substantially different from the existing rule. ThisRegulatory Circular summarizes the new equity rule, which also is attached. In determiningwhether the obvious error rule has any application to their equity option transactions, mem-bers 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 isabove or below the Theoretical Price for the series by an amount equal to at least theamount shown below:

Theoretical Price Minimum AmountBelow $2 $0.25$2 to $5 $0.40Above $5 to $10 $0.50Above $10 to $20 $0.80Above $20 $1.00

Definition of Theoretical Price. The Theoretical Price of an option series is, for multi-ply-listed options, the last bid (offer) price with respect to an erroneous sell (buy) trans-action just prior to the trade, disseminated by the competing exchange with the mostliquidity in that option class over the previous two calendar months. If there are noquotes for comparison, designated Trading Officials (TOs) will determine the TheoreticalPrice. For transactions occurring as part of the Rapid Opening System or Hybrid Open-ing System, Theoretical Price shall be the first quote after the transaction(s) in questionthat 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 CBOEMarket-Makers, erroneous buy (sell) transactions will be adjusted to their Theoreti-cal Price plus (minus) an adjustment penalty of either $.15 if the Theoretical Priceis under $3 or $.30 if the Theoretical Price is at or above $3. For ROS or HOSStransactions, adjust to the first non-erroneous quote after the erroneous transactionon CBOE, less (plus) the adjustment penalty.

Transactions Involving at least one non-CBOE Market-Maker: Where one partyto the transaction is not a CBOE Market-Maker, the transaction will be nullifiedunless both parties agree to an adjustment price within thirty (30) minutes of notifi-cation by Trading Officials of the Obvious Error.



2. No Bid Series: Electronic transactions in series quoted no bid at a nickel (i.e., $0.05offer) 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 openoutcry transactions arising out of a “verifiable disruption or malfunction” in the use or opera-tion of any Exchange automated quotation, dissemination, execution, or communicationsystem will either be nullified or adjusted by TOs. Transactions between CBOE MMs willbe adjusted to Theoretical Price (no penalty). Other transactions will be nullified.

4. Erroneous Print in Underlying: Electronic or open outcry transactions will be nullifiedprovided the erroneous print in the underlying market is higher or lower than the averagetrade in the underlying during a two-minute period before and after the bad print in questionby at least five times the average quote width during the same period.

Notification Requirement: Absent unusual circumstances, members must notify a TOwithin 15 minutes after the execution. For “verifiable systems problems,” Trading Officialsmay initiate action within 60 minutes of the occurrence.

Review and Determination: Absent unusual circumstances, TOs must render a decisionwithin 60 minutes of receiving notice and provide prompt verbal notification to the partiesinvolved.

Appeal to Obvious Error Panel: A party may request the Obvious Error Panel review aTO decision by submitting a request in writing to any TO within 30 minutes after receivingverbal notification of a final ruling. The Panel may affirm, overturn, or modify a TO decisionand must do so on trade date (unless appeal is after 2:30pm). The Panel consists of oneTFL 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/nullificationof trades executed below intrinsic value or trades executed as the result of an erroneousquote in the underlying.

For more information, please contact Trading Floor Liaisons, Floor Officials, Andrew Spiwakat (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 optionsand options on ETFs and HOLDRs. Paragraphs (a)(1) and (2) of this Rule have no applica-bility to trades executed in open outcry.

(a) Trades Subject to ReviewA member or person associated with a member may have a trade adjusted or nullified if, inaddition to satisfying the procedural requirements of paragraph (b) below, one of the follow-ing conditions is satisfied:




(1) Obvious Price Error: An obvious pricing error occurs when the execution priceof an electronic transaction is above or below the Theoretical Price for the series byan amount equal to at least the amount shown below:

Theoretical Price Minimum AmountBelow $2 $0.25$2 to $5 $0.40Above $5 to $10 $0.50Above $10 to $20 $0.80Above $20 $1.00

Definition of Theoretical Price. For purposes of this Rule only, the Theoretical Price ofan option series is, for series traded on at least one other options exchange, the last bidprice with respect to an erroneous sell transaction and the last offer price with respect toan erroneous buy transaction, just prior to the trade, disseminated by the competingoptions exchange that has the most liquidity in that option class in the previous twocalendar months. If there are no quotes for comparison, designated Trading Officialswill determine the Theoretical Price. For transactions occurring as part of the RapidOpening System (“ROS trades”) or Hybrid Opening System (“HOSS”), Theoretical Priceshall be the first quote after the transaction(s) in question that does not reflect theerroneous transaction(s).

Price Adjustment or Nullification: Obvious Pricing Errors will be adjusted or nullifiedin accordance with the following:

Transactions Between CBOE Market-Makers: Where both parties to the transac-tion are CBOE Market-Makers, the execution price of the transaction will be ad-justed by Trading Officials to the prices provided in Paragraphs (A) and (B) below,minus (plus) an adjustment penalty (“adjustment penalty”), unless both parties agreeto 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 Priceplus 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 Priceminus 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 theparties to the transaction is not a CBOE Market-Maker, the transactions will benullified by Trading Officials unless both parties agree to an adjustment price for thetransaction within thirty (30) minutes of being notified by Trading Officials of theObvious Error.

(2) No Bid Series: Electronic transactions in series quoted no bid at a nickel (i.e., $0.05offer) will be nullified provided at least one strike price below (for calls) or above (forputs) 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 openoutcry transactions arising out of a “verifiable disruption or malfunction” in the use oroperation of any Exchange automated quotation, dissemination, execution, or commu-nication system will either be nullified or adjusted by Trading Officials. Transactions thatqualify for price adjustment will be adjusted to Theoretical Price, as defined in paragraph(a)(1) above.

Regulatory Circular RG04-130 continuedRegulatory Circularscontinued


(4) Erroneous Print in Underlying: A trade resulting from an erroneous print dis-seminated by the underlying market which is later cancelled or corrected by thatunderlying market may be nullified. In order to be nullified, however, the trade must bethe result of an erroneous print that is higher or lower than the average trade in theunderlying security during a two-minute period before and after the erroneous print byan amount at least five times greater than the average quote width for such underlyingsecurity during the same period.

For purposes of this Rule, the average trade in the underlying security shall be deter-mined by adding the prices of each trade during the four minute time period referencedabove (excluding the trade in question) and dividing by the number of trades duringsuch time period (excluding the trade in question). For purposes of this Rule, theaverage quote width shall be determined by adding the quote widths of each separatequote during the four minute time period referenced above (excluding the quote inquestion) and dividing by the number of quotes during such time period (excluding thequote in question).

(b) Procedures for Reviewing Transactions

(1) Notification: Any member or person associated with a member that believes itparticipated in a transaction that may be adjusted or nullified in accordance with para-graph (a) must notify any Trading Official promptly but not later than fifteen (15) min-utes after the execution in question. Absent unusual circumstances, Trading Officialsshall not grant relief under this Rule unless notification is made within the prescribedtime periods.

In the absence of unusual circumstances, Trading Officials (either on their own motionor upon request of a member) must initiate action pursuant to paragraph (a)(3) abovewithin sixty (60) minutes of the occurrence of the verifiable disruption or malfunction.When Trading Officials take action pursuant to paragraph (a)(3), the members involvedin 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 TradingOfficial for review, the transaction shall be reviewed and a determination rendered,unless both parties to the transaction agree to withdraw the application for review priorto the time a decision is rendered.

Absent unusual circumstances (e.g., a large number of disputed transactions arisingout of the same incident), Trading Officials must render a determination within sixty(60) minutes of receiving notification pursuant to paragraph (b)(1) above. Trading Offi-cials shall promptly provide verbal notification of a determination to the membersinvolved 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 thenumber of Exchange members on the Obvious Error Panel must be directly en-gaged in market making activity and fifty percent of the number of Exchangemembers on the Obvious Error Panel must act in the capacity of a non-DPM floorbroker. The Exchange members shall be representatives from any of the follow-ing Committees: Equity Options Procedure Committee, Equity Market PerformanceCommittee, and Floor Officials Committee.



(ii) Scope of Review. If a party affected by a determination made under this Ruleso requests within the time permitted in paragraph (b), an Obvious Error Panel willreview decisions made by the Trading Officials under this Rule, including whetheran obvious error occurred, whether the correct Theoretical Price was used, andwhether the correct adjustment was made at the correct price. A party may alsorequest that the Obvious Error Panel provide relief as required in this Rule in caseswhere the party failed to provide the notification required in paragraph (b) and theTrading Officials declined to grant an extension, but unusual circumstances mustmerit special consideration.

(iii) Procedure for Requesting Review. A request for review must be made inwriting within 30 minutes after a party receives verbal notification of a final determi-nation by the Trading Officials under this Rule, except that if notification is madeafter 2:30 p.m. Central Time (“CT”), either party has until 8:30 a.m. CT the nexttrading day to request review. The Obvious Error Panel shall review the facts andrender a decision on the day of the transaction, or the next trade day in the casewhere a request is properly made the next trade day.

(iv) Panel Decision. The Obvious Error Panel may overturn or modify an actiontaken by the Trading Officials under this Rule upon agreement by a majority of thePanel representatives. All determinations by the Obvious Error Panel may be ap-pealed 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 determinationto the Appeals Committee, in accordance with Chapter XIX of the Exchange’s rules. Forpurposes of this Rule, a member must be aggrieved as described in Rule 19.1. Notwith-standing any provision in Rule 19.2 to the contrary, a request for review must be made inwriting (in a form and manner prescribed by the Exchange) no later than the close of tradingon the next trade date after the member receives verbal notification of such determinationby Trading Officials.

(e) Negotiated Trade Nullification

A trade may be nullified if the parties to the trade agree to the nullification. When all partiesto a trade have agreed to a trade nullification one party must promptly disseminate cancel-lation information in OPRA format.

Interpretations and Policies…..

.01 Applicability: Trading Officials may also allow for the execution of ROS trades (andassign those trades to participating ROS Market-Makers) that were not executed on theopening but that should have been executed had ROS opened the series at the non-errone-ous quote. The Exchange will endeavor to notify its members as soon as practicable afterthe correction of an erroneous print and will indicate that this may result in the adjustment oftrades executed pursuant to ROS. The only trades that will be adjusted are those that wereexecuted on the opening or those that should have executed on the opening. All adjust-ments 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 desig-nated 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 whichthe price received by the person selling the option is erroneously low, and an “erroneous buytransaction” is one in which the price paid by the person purchasing the option is erroneouslyhigh.



Rule Changes,Interpretationsand 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, asamended (“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 orga-nizations from borrowing or lending to their customers (Securities Exchange Act ReleaseNo. 50874, 69 FR 76803 (December 22, 2004)). Any questions regarding the rule changemay be directed to Jaime Galvan, Legal Division, at 312-786-7058. The text of the amendedrules 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 anyregistered capacity may borrow money from or lend money to any cus-tomer of such person unless:

(1) The member or member organization has written procedures allowingthe borrowing and lending of money between such registered personsand customers of the member or member organization; and

(2) the lending or borrowing arrangement meets one of the following condi-tions:

(A) the customer is a member of such person’s immediate family;

(B) the customer is a financial institution regularly engaged in thebusiness of providing credit, financing, or loans, or other entityor person that regularly arranges or extends credit in the ordi-nary course of business;

(C) the customer and the registered person are both registered per-sons of the same member organization;

(D) the lending arrangement is based on a personal relationshipwith the customer, such that the loan would not have been so-licited, offered, or given had the customer and the associatedperson not maintained a relationship outside of the broker/cus-tomer relationship; or

(E) the lending arrangement is based on a business relationshipoutside of the broker-customer relationship;

(b) Procedures.

(1) Members or member organizations must pre-approve in writingthe lending or borrowing arrangements described in subpara-graphs (a)(2)(C), (D), and (E) above.


(2) With respect to the lending or borrowing arrangements describedin subparagraph (a)(2)(A) above, a member or memberorganization’s written procedures may indicate that registeredpersons are not required to notify the member or member organi-zation, or receive member or member organization approval ei-ther prior to or subsequent to entering into such lending or borrow-ing arrangements.

(3) With respect to the lending or borrowing arrangements describedin subparagraph (a)(2)(B) above, a member or memberorganization’s written procedures may indicate that registeredpersons are not required to notify the member or member organi-zation or receive their approval either prior to or subsequent toentering into such lending or borrowing arrangements, providedthat the loan has been made on commercial terms that the cus-tomer generally makes available to members of the public simi-larly situated as to need, purpose, and creditworthiness. For pur-poses of this subparagraph, the member or member organizationmay rely on the registered person’s representation that the termsof the loan meet the above-described standards.

(c) The term immediate family shall include parents, grandparents, mother-in-law orfather-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in- law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece ornephew, and shall also include any other person whom the registered person sup-ports, 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, whichfiling amends Rule 8.85(a)(viii) regarding limitations on Designated Primary Market-Makersputting into effect stop orders. Amendement No. 1 makes clarifying word changes to theproposed language (Securities Exchange Act Release No. 50853, 69 FR 76510 (December21, 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. Newlanguage is italicized.

8.85 DPM Obligations(a) Dealer Transactions. Each DPM shall fulfill all of the obligations of a Market-Maker under the Rules, and shall satisfy each of the following requirements inrespect of each of the securities allocated to the DPM. To the extent that there isany inconsistency between the specific obligations of a DPM set forth in subpara-graphs (a)(i) through (a)(x) of this Rule and the general obligations of a Market-Maker under the Rules, subparagraphs (a)(i) through (a)(x) of this Rule shall gov-ern. Each DPM shall:

(i)-(vii) No change.

Rule Changes,Interpretations andPolicies continued

SR-CBOE-2004-66 continued


(viii) With respect to non-Hybrid classes and orders in Hybrid classes that arenot received by the Exchange electronically, not initiate a transaction forthe DPM’s own account that would result in putting into effect any stop orstop limit order which may be in the book or which the DPM representsas Floor Broker except with the approval of a Floor Official and when theDPM guarantees that the stop or stop limit order will be executed at thesame price as the electing transaction. The restrictions set forth in thisparagraph do not apply to stop or stop limit orders received through theHybrid System unless the terms of such orders are visible to the DPM, orunless 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 feeon all Designated Primary Market-Maker and Market-Maker contracts traded in options onthe Mini-Nasdaq-100 Index (“MNX”) (Securities Exchange Act Release No. 50837, 69 FR75575 (December 17, 2004)). Any questions regarding the rule change may be directed toJaime Galvan, Legal Division, at 312-786-7058. The text of the amended Fee Schedule isavailable 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 onETFs and on the Nasdaq-100 Index Tracking Stock (QQQ) until 3:15 p.m. (CST). The rulechange also codifies the hours of trading for options on ETFs and QQQs, and revises therule text and language in the rule filing by replacing the terms Exchange Traded Fund orETF with “Units”. (Securities Exchange Act Release No. 50840, 69 FR 75573 (December17, 2004)). Any questions regarding the rule change may be directed to Jim Flynn, LegalDivision, at 312-786-7070. The text of the amended rules is set forth below. New languageis 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 Rule5.3, and options on the Nasdaq-100 Index Tracking Stock may be traded on theExchange until 3:15 p.m. each business day.




.04 The Board of Directors has determined that the Exchange will not be open forbusiness on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, GoodFriday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day or Christ-mas Day. The Board has also determined that, when any holiday observed by theExchange falls on a Saturday, the Exchange will not be open for business on thepreceding Friday, and that when any holiday observed by the Exchange falls on aSunday, 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 (“theAct”), and Rule 19b-4 thereunder, the Exchange has filed the following proposed rule changeswith the Securities and Exchange Commission (“SEC”). Copies of the rule change filingsare available from the Legal Division. Members may submit written comments to the LegalDivision.

The effective date of a proposed rule change will be the date of approval by the SEC, unlessotherwise noted.

SR-CBOE-2004-88 Amended Fee Schedule

On December 21, 2004, the Exchange filed Rule Change File No. SR-CBOE-2004-88, whichfiling proposes to amend the Exchange Fee Schedule to make permanent the CustomerLarge Trade Discount Program and to lower the contract volume fee cap for Dow JonesIndex options. Any questions regarding the proposed rule change may be directed to JaimeGalvan, Legal Division, at 312-786-7058. The text of the amended Fee Schedule is avail-able 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, whichfiling proposes to amend Exchange Rule 17.10(d) by transferring the power to review thedecision not to initiate charges from the President of the Exchange to the Regulatory Over-sight Committee and by changing the time to assess such a review from 30 days to 45days. 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 forthbelow. 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) No change.(b) No change.(c) No change.




(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 thischapter,] Regulatory Oversight Committee within 45 days from the date the Ex-change serves the Subject with notice of a decision by the Business ConductCommittee pursuant to Rule 17.4(a) not to initiate charges that have been recom-mended by Exchange staff, the Board may order review of such decision. Suchreview shall be conducted in accordance with the procedures set forth in para-graph (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 mustaccord priority to all customer orders, that the DPM represents as agent over the DPM’sprincipal transactions, unless the customer who placed the order has consented to notbeing accorded such priority. Any questions regarding the proposed rule change may bedirected to Angelo Evangelou, Legal Division, at 312-786-7464. The text of the proposedrule amendments is set forth below. Proposed new language is underlined. Proposeddeleted 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 FloorBroker (to the extent that the DPM acts as a Floor Broker) and of an Order BookOfficial under the Rules, and shall satisfy each of the following requirements, inrespect 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 asagent over the DPM’s principal transactions, unless the customer who placed theorder 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 hedgesand other related trading activities in volatility futures to submit orders for placement in thebook for the corresponding index options by 8:00 a.m. The proposed rule also requires allExchange 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 bedirected to David Doherty, Legal Division, at 312-786-7466. The text of the proposed ruleamendments is set forth below. Proposed new language is underlined. Proposed deletedlanguage is [stricken out]. A copy of the filing is available from the Legal Division.




Rule 6.2A. Rapid Opening System

This rule has no applicability to series trading on the CBOE Hybrid Opening Sys-tem. Such series will be governed by Rule 6.2B.

(a) – (d) No change.

. . . Interpretation and Policies:


.03 Modified ROS Opening Procedure For Calculation of Settlement Prices ofVolatility Indexes.

All provisions set forth in Rule 6.2A and the accompanying interpretations andpolicies 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 contractson volatility indexes, the Exchange shall utilize a modified ROS opening procedurefor 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 ROSopening procedure will be utilized only on the final settlement date of the optionsand futures contracts on the applicable volatility index in each expiration month.

The following provisions shall be applicable when the modified ROS opening proce-dure set forth in this Rule 6.2A.03 is in effect for an index option with respect towhich a volatility index is calculated:

(i) [a]All orders (including public customer, broker-dealer, Exchange Market-Makerand away Market-Maker and specialist orders), other than contingency orders, willbe eligible to be placed on the Electronic Book for those option contract monthswhose prices are used to derive the volatility indexes on which options and futuresare traded, for the purpose of permitting those orders to participate in the ROSopening price calculation for the applicable index option series[;].

(ii) [a]All Market-Makers, including any LMMs and SMMs, if applicable, who arerequired to log on to ROS or RAES for the current expiration cycle shall be requiredto log on to ROS during the modified ROS opening procedure if the Market-Maker isphysically 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 havebeen appointed, the LMMs will collectively set the Autoquote values that will beused by ROS[;].

(iv) ROS contracts to trade for that index option series will be assigned equally, tothe greatest extent possible, to all logged-on Market-Makers, including any LMMsand SMMs if applicable[;].

(v) All index option orders for participation in the modified ROS opening procedurethat are related to positions in, or a trading strategy involving, volatility index op-tions or futures, and any change to or cancellation of any such order.

(A) must be received prior to 8:00 a.m. (CST), and




(B) may not be cancelled or changed after 8:00 a.m. (CST), unless the order is notexecuted in the modified ROS opening procedure and the cancellation or changeis submitted after the modified ROS opening procedure is concluded (providedthat any such order may be changed or cancelled after 8:00 a.m. (CST) and priorto 8:25 a.m. (CST) in order to correct a legitimate error, in which case the membersubmitting the change or cancellation shall prepare and maintain a memorandumsetting forth the circumstances that resulted in the change or cancellation andshall file a copy of the memorandum with the Exchange no later than the nextbusiness day in a form and manner prescribed by the Exchange).

The provisions of this subparagraph (v) may be suspended by two Floor Officialsin the event of unusual market conditions.

(vi) [a]All other index option orders for participation in the modified ROS openingprocedure, and any change to or cancellation of any such order, must be receivedprior to 8:25 a.m. [8:28 a.m.] (CST) in order to participate at the ROS openingprice for the applicable [that] index option series[;].

(vii) [a]All orders for participation in the modified ROS opening procedure must besubmitted electronically, except that Market-Makers on the Exchange’s tradingfloor may submit paper tickets for market orders only[; and].

(viii) [u]Until the Exchange implements a ROS system change that automaticallygenerates cancellation orders for Exchange Market-Maker, away Market-Maker,specialist, and broker dealer orders which remain on the Electronic Book followingthe modified ROS opening procedure, any such orders that were entered in theElectronic Book but were not executed in the modified ROS opening proceduremust be cancelled immediately following the opening of the applicable optionseries.

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 aDPM. 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 forthbelow. 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


.05 For those option classes and within such time periods as the appropriate FloorProcedure Committee, MTS or the President of the Exchange may designate,members may, prior to the scheduled opening rotation, enter option market quoteindications based upon the anticipated opening price of the security underlyingsuch designated option class. This interpretation will not impose upon membersan affirmative responsibility to provide and post pre-opening option market quoteindicators. Generally, pre-opening option market quote indications would be pro-vided by members for options classes whose underlying security is sold over-the-counter and those option classes whose underlying security shows little marketvolatility.




The following procedures shall be followed by members and the Order Book Offi-cial, [or] DPM, or LMM when posting pre-opening option market quote indications.

(a) For those options classes designated as eligible for pre-opening option marketquote 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 marketquote indications at which time the OBO, [or] DPM, or LMM shall post these indica-tions. Upon the opening of the underlying security and in no case earlier than 8:30a.m. (CT) the OBO, [or] DPM, or LMM shall request verbal confirmation from thetrading crowd that such pre-opening option market quote indications reflect theactual market and constitute valid opening quotations. If the crowd indicates thatsuch pre-opening option market quote indications reflect the actual market andconstitute valid opening quotations, the OBO, [or] DPM, or LMM shall determinethat a simultaneous opening rotation has occurred. If they do not confirm the indica-tions, an opening rotation in accordance with applicable Exchange Rules for allseries in which floor brokers in the crowd or the Book hold executable limit ormarket 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 appli-cable Exchange Rules.

(c) Notwithstanding paragraphs (a) and (b), the OBO, [or] DPM, or LMM shall directthat an opening rotation take place pursuant to applicable exchange Rules if (i) theOBO, [or] DPM, or LMM fails to receive market quote indications; or (ii) the under-lying security opens substantially higher or lower than the opening price anticipatedby the crowd that provided the pre-opening market quote indications; or (iii) thereare substantial order imbalances affecting the options class; or (iv) for such otherreasons as appropriate Floor Officials, the OBO, the DPM, or LMM or the Ex-change may determine.

Rule 6.2 Trading Rotations

* * * * *….Interpretations and Policies

.01 (a) Trading rotations shall be employed at the opening of the Exchange eachbusiness day. For each class of option contracts that has been approved for trad-ing, the opening rotation shall be conducted by the [Board Broker,] DesignatedPrimary Market-Maker (“DPM”), Lead Market-Maker (“LMM”), or Order Book Offi-cial (“OBO”) acting in such class of options. The opening rotation in each class ofoptions shall be held promptly following the opening of the underlying security onthe 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 optionsshould 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, orOBO should ordinarily first open the one or more series of options of a given classhaving the nearest expiration, then proceed to the series of options having the nextmost distant expiration, and so forth, until all series have been opened. If both putsand 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 shallalternate the opening of put series and call series. A [Board Broker,] DPM, LMM, orOBO may conduct the opening rotation in another manner only with the approval oftwo Floor Officials or at the direction of the appropriate Floor Procedure Committee.A modified opening rotation such as that described in Interpretation .02 to Rule24.13 may be conducted for certain index options classes.




(c) In the event an underlying security has not opened within a reasonable timeafter 8:30 a.m. (Chicago time), the [Board Broker,] DPM, LMM, or OBO acting inoption contracts on such security shall report the delay to a Floor Official and aninquiry shall be made to determine the cause of the delay. The opening rotation foroption contracts in such security shall be delayed until the underlying security hasopened unless two Floor Officials determine that the interests of a fair and orderlymarket are best served by opening trading in the option contracts.

(d) No change.


Rule 6.2B Hybrid Opening System

(a) For a period of time before the opening of trading in the underlying security (orin the case of index options, prior to 8:30 a.m., CT), as determined by the appro-priate Floor Procedure Committee (FPC) and announced to the membership viaRegulatory Circular, the Hybrid System will accept orders and quotes. The HybridSystem 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 businessday and any orders submitted before the opening. At a randomly selected timewithin a number of seconds after the primary market for the underlying securitydisseminates the opening trade or the opening quote (or after 8:30 a.m. for indexoptions unless unusual circumstances exist), the System initiates the openingprocedure and sends a notice (“Opening Notice”) to market participants who maythen submit their opening quotes. The DPM or any appointed LMM for the classmust enter opening quotes. Spread orders and contingency orders do not partici-pate 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 theExpected Opening Price (“EOP”) and expected opening size (“EOS”) given thecurrent resting orders during the EOP Period (“EOP Period”). The appropriate FPCwill establish the duration of the EOP Period on a class basis at between five andsixty seconds. The EOP, which will be calculated and disseminated to marketparticipants every few seconds, is the price at which the greatest number oforders in the Book are expected to trade. After the Opening Notice is sent, quotesand orders may be submitted without restriction. An EOP may only be calculatedif: (i) there are market orders in the Book, or the Book is crossed (highest bid ishigher than the lowest offer) or locked (highest bid equals lowest offer), and (ii) theDPM’s quote (or if there is no DPM appointed to the class, at least one quote fromeither a Market-Maker or LMM with an appointment in the class) is present andcomplies 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 theDPM for the series. In classes in which no DPM has been appointed, there is noquote from at least one Market-Maker or LMM with an appointment in the class;

(ii) – (iii) No change.

(f) – (i) No change.




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 ruleshall apply only to equity option classes designated by the Exchange to be tradedon the CBOE Hybrid System and has no applicability to index option and options onETF classes. The term “market participant” as used throughout this rule refers toa[n in-crowd] Market-Maker, [a Market-Maker complying with the in-person require-ments of Rule 8.7.03(B)(1) who submits quotes from off of the floor of the Ex-change through the facilities of the Exchange,] an in-crowd DPM, an e-DPM, and afloor broker representing orders in the trading crowd. The term “in-crowd marketparticipant” only includes an in-crowd Market-Maker, in-crowd DPM, [or] and floorbroker representing orders in the trading crowd.

(a) Allocation of Incoming Electronic Orders: The Exchange shall apply, foreach 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 uni-formly across all options under its jurisdiction, shall be a weightedaverage of the percentages derived for Components A and Bmultiplied by the size of the incoming order. Initially, the weightingof Components A and B shall be equal, represented mathemati-cally by the formula: ((Component A Percentage + Component BPercentage)/2) * incoming order size.

[The final weighting formula for index options and options on ETFsshall be established by the appropriate FPC and may vary byproduct. Changes made to the percentage weightings of Compo-nents A and B shall be announced to the membership via Regula-tory 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 Ordersin Electronic Book

* * * * *

(i) No change.




(ii) * * * * *

Component A: No change.

Component B: No change.

Final Weighting: The final weighting formula for equity options, which shall bedetermined by the appropriate FPC and apply uniformly across all options underits jurisdiction, shall be a weighted average of the percentages derived for Compo-nents A and B, multiplied by the size of the order(s) in the electronic book. Ini-tially, the weighting of Components A and B shall be equal, represented math-ematically by the formula: ((Component A Percentage + Component B Percent-age)/2) * electronic book order size.

[The final weighting formula for index options and options on ETFs shall be estab-lished by the appropriate FPC and may vary by product. Changes made to thepercentage weightings of Components A and B shall be announced to the mem-bership via Regulatory Circular at least one day before implementation of thechange.]

(iii) No change.

(d) No change.

(e) Classes Trading on Hybrid

By [December 31, 2003, Hybrid will be operational in CBOE’s 200 most activeequity option classes and, by] December 31, 2004, Hybrid will be operational inCBOE’s 500 most active equity option classes. The Exchange intends to imple-ment Hybrid floorwide in all other equity classes by the fourth quarter of 2006.[Index option classes and options on ETFs specifically designated by the appro-priate Floor Procedure Committee may trade on the Hybrid System. In order to beeligible for trading on Hybrid, index option classes and options on ETFs mustutilize an in-crowd Designated Primary Market- Maker.]

Interpretations and Policies . . .

No change.

* * * * *

Rule 6.45B Priority and Allocation of Trades in Index Options andOptions on ETFs on the CBOE Hybrid System

Generally: The rules of priority and order allocation procedures set forth in thisrule shall apply only to index options and options on ETFs that have been desig-nated by the appropriate Exchange procedures committee for trading on the CBOEHybrid System. The term “market participant” as used throughout this rule refersto a Market-Maker, an in-crowd DPM or LMM, an e-DPM with an appointment inthe subject class, and a floor broker representing orders in the trading crowd. Theterm “in-crowd market participant” only includes an in-crowd Market-Maker, in-crowd DPM or LMM, and floor broker representing orders in the trading crowd.

(a) Allocation of Incoming Electronic Orders: The appropriate Exchange pro-cedures committee will determine to apply, for each class of options, one of the




following rules of trading priority described in paragraphs (i) or (ii). The Exchangewill issue a Regulatory Circular periodically specifying which priority rules will gov-ern which classes of options any time the appropriate Exchange committee changesthe priority.

(i) Price-Time or Pro-Rata Priority

Price-Time Priority: Under this method, resting quotes and orders in the book areprioritized according to price and time. If there are two or more quotes or orders atthe best price then priority is afforded among these quotes or orders in the order inwhich they were received by the Hybrid System; or

Pro Rata Priority: Under this method, resting quotes and orders in the book areprioritized according to price. If there are two or more quotes or orders at the bestprice then trades are allocated proportionally according to size (in a pro rata fash-ion). The executable quantity is allocated to the nearest whole number, with frac-tions ½ or greater rounded up and fractions less than ½ rounded down. If there aretwo market participants that both are entitled to an additional ½ contract and thereis only one contract remaining to be distributed, the additional contract will be dis-tributed to the market participant whose quote or order has time priority.

Additional Priority Overlays Applicable to Price-Time or Pro-Rata PriorityMethods

In addition to the base allocation methodologies set forth above, the appropriateExchange procedures committee may determine to apply, on a class-by-class ba-sis, either or both of the following designated market participant overlay priorities.The Exchange will issue a Regulatory Circular periodically which will specify whichclasses of options are subject to these additional priorities as well as any time theappropriate Exchange procedures committee changes these priorities.

(1) Public Customer: When this priority overlay is in effect, the highestbid and lowest offer shall have priority except that public customer ordersshall have priority over non-public customer orders at the same price. Ifthere are two or more public customer orders for the same options seriesat the same price, priority shall be afforded to such public customer ordersin the sequence in which they are received by the System, even if the ProRata Priority allocation method is the chosen allocation method. For pur-poses of this Rule, a Public Customer order is an order for an account inwhich no member, non-member participant in a joint-venture with a mem-ber, or non-member broker-dealer (including a foreign broker-dealer) has aninterest.

(2) Participation Entitlement: The appropriate Exchange procedures com-mittee may determine to grant DPMs, LMMs, or e-DPMs participationentitlements pursuant to the provisions of Rule 8.87 or 8.15B. In allocatingthe participation entitlement, all of the following shall apply:

(A) To be entitled to their participation entitlement, a DPM’sor LMM’s order and/or quote must be at the best price.

(B) A DPM or LMM may not be allocated a total quantitygreater than the quantity that the DPM or LMM is quoting




(including orders not part of quotes) at that price. If ProRata Priority is in effect, and the DPM’s or LMM’s allo-cation of an order pursuant to its participation entitle-ment is greater than its percentage share of quotes/orders at the best price at the time that the participationentitlement is granted, the DPM or LMM shall not re-ceive any further allocation of that order.

(C) In establishing the counterparties to a particular trade,the DPM’s or LMM’s participation entitlement must firstbe counted against the DPM’s or LMM’s highest prioritybids or offers.

(D) The participation entitlement shall not be in effect un-less the Public Customer priority is in effect in a prioritysequence ahead of the participation entitlement and thenthe participation entitlement shall only apply to any re-maining balance.

(ii) Ultimate Matching Algorithm (“UMA”): Under this method, a market partici-pant who enters a quotation and whose quote is represented by the disseminatedCBOE best bid or offer (“BBO”) shall be eligible to receive allocations of incomingelectronic orders for up to the size of its quote, in accordance with the principlesdescribed below. As an initial matter, if the number of contracts represented in thedisseminated quote is less than the number of contracts in an incoming electronicorder(s), the incoming electronic order(s) shall only be entitled to receive a num-ber of contracts up to the size of the disseminated quote, in accordance with Rule6.45B(a)(ii)(B). The balance of the electronic order will be eligible to be filled at therefreshed quote either electronically (in accordance with paragraph (a)(ii)(B) be-low) or manually (in accordance with Rule 6.45B(b)) and, as such, may receive asplit price execution.

(A) Priority of Orders in the Electronic Book

(1) Public Customer Orders: Public customer orders in the electronicbook have priority. Multiple public customer orders in the electronic bookat the same price are ranked based on time priority. If a public customerorder(s) in the electronic book matches, or is matched by, a market par-ticipant quote, the public customer order(s) shall have priority and, thebalance of the incoming order, if any, will be allocated pursuant to Rule6.45B(a).

(2) Broker-Dealer Orders: If pursuant to Rule 7.4(a) the appropriate Ex-change procedures committee determines to allow certain types of bro-ker-dealer orders to be placed in the electronic book, then for purposes ofthis rule, the cumulative number of broker-dealer orders in the electronicbook at the best price shall be deemed one “market participant” regard-less of the number of broker-dealer orders in the book. The allocation duethe broker-dealer orders in the electronic book by virtue of their beingdeemed a “market participant” shall be distributed among each broker-dealer order comprising the “market participant” pursuant to Rule 6.45B(a).

(B) Allocation




(1) Market Participant Quoting Alone at BBO: When a market participantis quoting alone at the disseminated CBOE BBO and is not subsequentlymatched in the quote by other market participants prior to execution, it willbe entitled to receive incoming electronic order(s) up to the size of itsquote. If another market participant joins in the disseminated quote priorto execution of an incoming electronic order(s) such that more than onemarket participant is quoting at the BBO, incoming electronic order(s) willbe distributed in accordance with (B)(2) below.

(2) More than One Market Participant Quoting at BBO: When more thanone market participant is quoting at the BBO, inbound electronic ordersshall be allocated pursuant to the following allocation algorithm:

Allocation Algorithm

Incoming Order (Equal Percentage based on + (Pro-rata Percentage basedSize * number of market participants on size of market

quoting at BBO) participant quotes)(Component A) (Component B)2

Where:

Component A: The percentage to be used for Component A shall be anequal percentage, derived by dividing 100 by the number of market partici-pants quoting at the BBO.

Component B: Size Prorata Allocation. The percentage to be used forComponent B of the Allocation Algorithm formula is that percentage thatthe size of each market participant’s quote at the best price representsrelative to the total number of contracts in the disseminated quote.

Final Weighting: The final weighting formula, which shall be establishedby the appropriate Exchange procedures committee and may vary by prod-uct, shall be a weighted average of the percentages derived for Compo-nents A and B multiplied by the size of the incoming order. Changes madeto the percentage weightings of Components A and B shall be announcedto the membership via Regulatory Circular at least one day before imple-mentation of the change.

(C) Participation Entitlement: If a DPM, LMM, or e-DPM is eligible for an alloca-tion pursuant to the operation of the Algorithm described in paragraph (a) of Rule6.45B, the DPM, LMM, or e-DPM may be entitled to receive an allocation (not toexceed the size of its quote) equal to either:

(1) the greater of the amount it would be entitled to pursuant to the partici-pation right established pursuant to Rule 8.87 or 8.15B (and RegulatoryCirculars issued thereunder) or the amount it would otherwise receive pur-suant to the operation of the Algorithm described above provided, how-ever, that in calculating the DPM’s allocation under the Algorithm, DPMs/LMMs utilizing more than one membership in the trading crowd where thesubject class is traded shall count as two market participants for purposesof Component A of the Algorithm; or

(2) the amount it would be entitled to pursuant to the participation rightestablished pursuant to Rule 8.87 and 8.15B (and Regulatory Circularsissued thereunder); or




(3) The amount it would be entitled to receive pursuant to the operation ofthe Algorithm described above provided, however, that in calculating theDPM’s or LMM’s allocation under the Algorithm, DPMs or LMMs utilizingmore than one membership in the trading crowd where the subject classis traded shall count as two market participants for purposes of Compo-nent A of the Algorithm.

The appropriate Exchange procedures committee shall determine whichof the preceding two entitlement formulas will be in effect on a class-by-class basis. All pronouncements regarding the entitlement formula shallbe made via Regulatory Circular. The participation entitlement percent-age is expressed as a percentage of the remaining quantity after all pub-lic customer orders in the electronic book have been executed.

(b) Allocation of Orders Represented in Open Outcry: The allocation of ordersthat are represented in the trading crowd by floor brokers (including DPMs actingas 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 inwhich bids (offers) are made.

(i) Priority of Orders in the Electronic Book

(A) Public Customer Orders: Public customer orders in the electronicbook have priority. Multiple public customer orders in the electronic bookat the same price are ranked based on time priority. If a public customerorder(s) in the electronic book matches, or is matched by, an oral bid oroffer provided by a member of the trading crowd, the public customerorder(s) shall have priority and the balance of the order, if any, will beallocated in open outcry in accordance with paragraph (B) below.

(B) Broker-Dealer Orders: If pursuant to Rule 7.4(a) the appropriate Ex-change procedures committee determines to allow broker-dealer ordersto be placed in the electronic book, then for purposes of this rule, thecumulative number of broker-dealer orders in the electronic book at thebest price shall be deemed one “book market participant” regardless ofthe number of broker-dealer orders in the book. The allocation due thebroker-dealer orders in the electronic book by virtue of their being deemeda “book market participant” shall be in accordance with paragraph (ii)below and shall be distributed among each broker-dealer order compris-ing the “book market participant” in accordance with the Allocation Algo-rithm 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 isNOT a book market participant, priority shall be afforded in accordancewith the allocation principles contained in CBOE Rule 6.45(a) or (b) andNOT Rule 6.45B(b).

If two or more bids (offers) represent the best price, one of which repre-sents a book market participant, priority shall be afforded to the marketparticipants in the sequence in which their bids (offers) were made. Pro-




vided however that the first market participant to respond shall be entitledto 70% of the order. The second market participant to respond (ifascertainable) 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 amongthe remaining market participants bidding (offering) at the same price andthe book market participant (as defined in Rule 6.45B(b)(ii)(2) above). If itis not possible to determine the order in which market participants re-sponded, the balance of the order shall be apportioned equally among theremaining market participants bidding (offering) at the same price and, ifapplicable, the book market participant.

In the event a market participant declines to accept any portion of theavailable contracts, any remaining contracts shall be apportioned equallyamong the other participants who bid (offered) at the best price (includingthe book market participant, if applicable) at the time the market wasestablished until all contracts have been apportioned. The floor brokerrepresenting the order (including DPMs acting as agent under 8.85(b)) shalldetermine 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 orderor security future-option order as defined in Rule 1.1(ii)(b) and Rule 1.1(zz)(b), re-spectively) and bidding (offering) on a net debit or credit basis (in a multiple of theminimum increment) may execute the order with another member without givingpriority to equivalent bids (offers) in the trading crowd or in the electronic bookprovided at least one leg of the order betters the corresponding bid (offer) in thebook. Stock-option orders and security future-option orders, as defined in Rule1.1(ii)(a) and Rule 1.1(zz)(a), respectively, have priority over bids (offers) of thetrading 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 inElectronic Book

Market participants, as defined in Rule 6.45B, may submit quotes or orders elec-tronically to trade with orders in the electronic book. A floor broker market partici-pant may only represent as agent customer orders or orders from unaffiliated bro-ker-dealers. When a market participant’s quote or order interacts with the order inthe book, a trade occurs, CBOE will disseminate a last sale report, and the size ofthe book order will be decremented to reflect the execution.

In the limited instance when the appropriate Exchange procedures committee hasdetermined that the allocation of incoming electronic orders shall be pursuant toprice-time priority as described in Rule 6.45B(a)(i), allocation of orders in the Elec-tronic Book pursuant to this paragraph shall be based on time-priority (i.e., allo-cated to the first market participant to interact with the order in the book, up to thesize of that market participant’s order). In all other instances, the allocation of thebook order shall be as follows:

(i) One Market Participant Trades with the Electronic Book: If only one marketparticipant submits an electronic order or quote to trade with an order in the elec-tronic book, that market participant shall be entitled to receive an allocation of theorder in the electronic book up to the size of the market participant’s order.




(ii) Multiple Market Participant Trade with the Electronic Book: Each marketparticipant that submits an order or quote to buy (sell) an order in the electronicbook within a period of time not to exceed 5-seconds of the first market partici-pant to submit an order (“N-second group”) shall be entitled to receive an alloca-tion of the order in the electronic book pursuant to the following allocation algo-rithm:

Allocation Algorithm

Electronic Book (Equal percentage based on + (Size pro-rata percentageOrder(s) Size * number of members of based on size of

“N-second group”) orders of “N-secondgroup” members)

(Component A) (Component B)2

Where:

Component A: The percentage to be used for Component A shall be an equalpercentage 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 Compo-nent B of the Allocation Algorithm formula is that percentage that each marketparticipant of the “N-second group’s” quote at the best price represents relative tothe total number of contracts of all market participants of the “N-second group.”The appropriate Exchange procedures committee may determine that the maxi-mum quote size to be used for each market participant in the Component Bcalculation shall be no greater than the cumulative size of orders resident in theelectronic book at the best price at which market participants are attempting tobuy (sell).

Final Weighting: The final weighting formula, which shall be established by theappropriate Exchange procedures committee and may vary by product, shall be aweighted average of the percentages derived for Components A and B, multipliedby the size of the order(s) in the electronic book. Changes made to the percent-age weightings of Components A and B shall be announced to the membershipvia Regulatory Circular at least one day before implementation of the change.

Length of “N-Second Group” Timer: The appropriate Exchange procedurescommittee will determine the length of the “N-second group” timer on a class-by-class basis provided, however, that the duration of the “N-second group” timershall not exceed five seconds. Any changes to the duration of the “N-secondgroup” timer shall be announced via Regulatory Circular.

(iii) Participation Entitlement: There is no DPM or LMM participation entitle-ment 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 dis-seminated 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 bedeemed “firm” disseminated market quotes.




(B) The Market-Makers whose quotes are locked will receive a quote update notifi-cation advising that their quotes are locked, unless the “counting period” referencedbelow is set to zero seconds.

(C) When the market locks, a “counting period” will begin during which Market-Makers whose quotes are locked may eliminate the locked market. Provided, how-ever, that in accordance with subparagraph (A) above a Market-Maker will be obli-gated to execute customer and broker-dealer orders eligible for automatic execu-tion 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 willautomatically execute against each other in accordance with the allocation algo-rithm described above in Rule 6.45B(a). The length of the counting period will beestablished by the appropriate Exchange procedures committee, may vary by prod-uct, and will not exceed one second.

(ii) Inverted Quotes: The Hybrid System will not disseminate an internally crossedmarket (i.e., the CBOE best bid is higher than the CBOE best offer). If a Market-Maker submits a quote (“incoming quote”) that would invert an existing quote (“ex-isting quote”), the Hybrid System will change the incoming quote such that it locksthe first quote and send a notice to the second Market-Maker indicating that itsquote was changed. Locked markets are handled in accordance with paragraph(d)(i) above. During the lock period, if the existing quote is cancelled subsequent tothe time the incoming quote is changed, the incoming quote will automatically berestored to its original terms.

Interpretations and Policies . . .

.01 Principal Transactions: Order entry firms may not execute as principal againstorders they represent as agent unless: (i) agency orders are first exposed on theHybrid System for at least thirty (30) seconds, (ii) the order entry firm has beenbidding or offering for at least thirty (30) seconds prior to receiving an agency orderthat is executable against such bid or offer, or (iii) the order entry firm proceeds inaccordance with the crossing rules contained in Rule 6.74.

.02 Solicitation Orders. Order entry firms must expose orders they represent asagent for at least thirty (30) seconds before such orders may be executed electroni-cally via the electronic execution mechanism of the Hybrid System, in whole or inpart, against orders solicited from members and non-member broker-dealers totransact with such orders.

*******

Rule 8.14 Index Hybrid Trading System Classes: Market-MakerParticipants

(a) Generally: The Exchange procedures committee may authorize for trading onthe CBOE Hybrid Trading System or Hybrid 2.0 Program index options and optionson ETFs currently trading on the Exchange. The appropriate Exchange procedurescommittee shall determine the eligible categories of Market-Maker participants foroption classes currently trading on the Exchange, which may include:

Designated Primary Market-Makers (“DPM”): Market-Makers as defined in Rule8.80 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 ac-tivities are governed by, among other rules, CBOE Rule 8.15A.




Electronic DPMs (“e-DPM”): Market-Makers as defined in Rule 8.92 whose activi-ties 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 gov-erned by, among other rules, CBOE Rules 8.1- 8.11.

(b) Each class designated by the appropriate Exchange committee for trading onHybrid or the Hybrid 2.0 Platform shall have an assigned DPM or LMM. Theappropriate Exchange committee may determine to designate classes for tradingon Hybrid or the Hybrid 2.0 Platform without a DPM or LMM provided the followingconditions 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 thecontinuous quoting obligations imposed by CBOE Rule 8.7(d);

3. In the event CBOE activates request-for-quote (“RFQ”) functionality inindex classes, each MM will have an obligation to respond to that per-centage of RFQs as determined by the appropriate Exchange proce-dures committee, provided however, that such percentage shall not beless than 80%. Regarding RFQ responses:

(i) MMs must comply with the bid-ask differential contained in Rule8.8(b)(iv):

(ii) Responses must be submitted within the amount of time speci-fied by the appropriate Exchange procedures committee fromthe time the RFQ is entered.

(iii) Responses must be for a minimum of ten contracts or a sizespecified by the appropriate Exchange procedures committee,whichever is greater.

(iv) MMs responding to an RFQ must maintain a continuous marketin that series for a subsequent 30-second period (or for someother time specified by the appropriate FPC) or until his/her quoteis filled in its entirety. A MM may change his quotes during this30-second period but he may not cancel them without replacingthem. If the MM does cancel without replacing the quote his/herresponse to the RFQ will not count toward the MM’s responserate requirement set forth above. A MM will be considered tohave responded to the RFQ if he has a quote in the market forthe series at the time the RFQ is received and he maintains it forthe appropriate period of time.

4. Exchange has designated an entity responsible for complying withIntermarket Linkage obligations in that particular class.

*****

Rule 8.15 Lead Market-Makers and Supplemental Market-Makers inNon-Hybrid Classes

No change.

*****






Rule 8.15A Lead Market-Makers in Hybrid Classes

(a) Assignment, Removal, and Evaluation of LMMs: The appropriate MarketPerformance Committee (the “Committee”) may appoint one or more Market-Mak-ers in good standing with an appointment in an option class for which a DPM hasnot been appointed as Lead Market-Makers (“LMMs”).

(i) LMMs shall be appointed on the first day following an expiration for a period of noless than one month (“expiration month”) and may be assigned to a class with oneor more LMMs.

A. Factors to be considered by the Committee in selecting LMMs include: ad-equacy 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, onlyone member may receive an LMM appointment.

B. Removal of LMMs may be effected by the Committee on the basis of the failureof 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 seekreview 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 beeligible for or shall resign his appointment or shall fail to perform his duties, theCommittee may appoint an interim LMM to complete the monthly obligations of theformer LMM.

D. The Committee shall review and evaluate the conduct of LMMs, including but notlimited to compliance with Rules 8.1, 8.2, 8.3, and 8.7 and may hold all LMMsresponsible 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 differ-entials permitted by Rule 8.7(b) in 80% of the option series within theirassigned classes;

(ii) assure that each of its displayed market quotations is honored for at leastthe number of contracts prescribed pursuant to Rule 8.51;

(iii) perform the above obligations for a period of one expiration month com-mencing on the first day following an expiration. Failure to perform suchobligations for such time may result in suspension of up to three monthsfrom 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 two-sided quote complying with the current quote width requirements of Rule8.7(b)(iv) for a minimum of ten contracts for public customers and onecontract for non-public customers.

8.15B Participation Entitlement of LMMs

(a) The appropriate Market Performance Committee may establish, on a class-by-class basis, a participation entitlement formula that is applicable to LMMs.


(b) To be entitled to a participation entitlement, the LMM must be quoting at thebest bid/offer on the Exchange and the LMM may not be allocated a total quantitygreater than the quantity for which the LMM is quoting at the best bid/offer on theExchange. The participation entitlement is based on the number of contractsremaining after all public customer orders in the book at the best bid/offer on theExchange have been satisfied.

(c) The LMM participation entitlement shall be: 50% when there is one Market-Maker also quoting at the best bid/offer on the Exchange; 40% when there are twoMarket-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 onthe 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 thequantity for which the LMM is quoting at the best bid/offer on the Exchange.

The appropriate Market Performance Committee may determine, on a class-by-class basis, to decrease the LMM participation entitlement percentages from thepercentages specified in paragraph (c). Such changes will be designated as astated policy, practice, or interpretation with respect to the administration of Rule8.15B within the meaning of Section 19(b)(3)(A) and submitted to the SEC aseffective upon filing.



At its meeting on December 15, 2004, the Business Conduct Committee (“BCC”) resolvedthe following disciplinary matter by accepting an Offer of Settlement in which the respon-dent consented to a stipulation of facts and findings as detailed below without admitting ordenying 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, wascensured and fined $10,000 for the following conduct. During the approximate period fromin or about July 2003 through in or about December 2003, Breakwater failed to obtain CivilApplicant Responses (“CARs”) for all of its associated persons. Additionally, during theapproximate period from in or about July 2003 through on or about April 27, 2004, Breakwa-ter operated without a properly registered Financial and Operational Principal (“FINOP”).Finally, since December 2003, Breakwater impeded and delayed the Exchange’s examina-tion by its failure to respond timely to at least two written regulatory requests related to itsCARs in connection with the conduct described above1. (CBOE Rules 3.6A – Qualificationand Registration of Certain Associated Persons; 4.2 – Adherence to Law; 15.1 - Mainte-nance, Retention and Furnishing of Books, Records and Other Information; 17.2(b)- Com-plaint and Investigation: Requirement to Furnish Information; Section 17(a) of the Securi-ties Exchange Act of 1924 as amended (the “Act”) and Rules 17a-3 – Records to be Madeby Certain Brokers and Dealers; 17a-4 – Records to be Preserved by Certain Brokers andDealers; and Section 17(f) and Rule 17f-2 – Fingerprinting of Securities Industry Person-nel.)

DisciplinaryDecisions

1On December 16, 2004 the Exchange received the requested Civil Applicant Responses.

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