[Federal Register Volume 60, Number 36 (Thursday, February 23, 1995)]
[Notices]
[Pages 10134-10135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4401]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35388; File No. SR-CBOE-95-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated, Related to 
Retail Automatic Execution System

February 16, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on January 18, 
1995, the Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rules to allow the Exchange's Control 
Room to turn off the Retail Automatic Execution System (``RAES''). The 
amendments would add an Interpretation to Exchange Rules 24.15 and 6.8. 
The text of the proposed rule change is available at the office of the 
Secretary, CBOE, and at the Commission.

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

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

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

    The purpose of the proposed rule change is to grant the Exchange's 
Control Room the authority to turn off RAES if there is a system 
malfunction that affects the Exchange's ability to disseminate or 
update market quotes. Specifically, the proposal would add a rule 
interpretation to Exchange Rules 24.15 and 6.8 to grant the senior 
person then in charge of the Exchange's Control Room the authority to 
turn off RAES if there is a system malfunction that affects the 
Exchange's ability to disseminate or update market quotes.
    When RAES receives an order, the system automatically will attach 
to the order its execution price, determined by the prevailing market 
quote at the time of the order's entry into the system. A buy order 
will pay the prevailing market quote for an offer and a sell order will 
sell at the prevailing market quote for a bid. A market maker who has 
signed on as a participant in RAES will be designated as a contra-
broker on the trade. Trades are assigned to these participating market 
makers on a rotating basis. Therefore, by agreeing to participate in 
RAES, a market maker is automatically assigned trades based on the 
prevailing market quote that is then being disseminated. Consequently, 
it is important that the prevailing market quote be accurate, because 
otherwise market makers participating in RAES may be assigned trades at 
prices other than the actual prevailing market quote.
    In addition, if there is a quote dissemination problem such that 
incorrect quotes are being displayed, it could result in a customer's 
order being filled at a price other than the quote the customer sees on 
display.
    The proposed interpretations are necessary to prevent market makers 
from being assigned trades based on inaccurate or ``stale'' market 
quotes and to prevent customer orders from being filled based on such 
inaccurate or ``stale'' market quotes. The proposed Interpretations are 
also necessary to prevent a situation where customers' orders are 
filled at prices other than the prices the customers see displayed. 
Pursuant to the proposed interpretations, the senior person then in 
charge of the Exchange's Control Room will have the ability to act 
quickly to turn off RAES if there is a system malfunction that affects 
the Exchange's ability to disseminate or update market quotes. Since 
RAES trades are based on the current disseminated quote, RAES trades 
would be based on inaccurate or ``stale'' quotes during a system 
malfunction that interferes with dissemination of current quote 
information. The Exchange believes it is important for the Control Room 
to have this power to turn off RAES since the Control Room will most 
likely learn of the system malfunction before Floor Officials or other 
Exchange Staff and consequently the Control Room can act in a timely 
manner to prevent trades based on ``stale'' market quotes.
    If RAES is turned off, the orders that would have been routed to 
RAES will be re-routed to the Floor Broker routing printer in the 
trading crowd or to the member firm booths. Where the order is rerouted 
depends upon the parameters member firms have set for their customers' 
orders prior to entering the orders onto RAES.\1\

    \1\CBOE understands that when determining order parameters for 
routing purposes, the member firms look to (1) the size of the 
order, (2) whether the series is on RAES, and (3) whether it is a 
market order or an immediately executable limit order. Telephone 
conservation between Edward Joyce, CBOE, Michael Meyer, Attorney, 
Schiff, Hardin, and Waite, Michael Walinskas, Branch Chief, Office 
of Market Supervision (``OMS''), Division of Market Regulation 
(``Division''), Commission, and John Ayanian, Attorney, OMS, 
Division, Commission, on Monday, February 13, 1995. [[Page 10135]] 
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    Pursuant to the proposed interpretations, once the system 
malfunction has been corrected and the market quotes have been updated, 
either the senior person then in charge of the Exchange's Control Room, 
or the Order Book Official, or the RAES Supervisor may re-start RAES.

Conclusion

    CBOE believes that the proposed rule change is consistent with and 
further the objectives of Section 6(b)(5) of the Act, in that the rules 
change is designed to perfect the mechanisms of a free and open market 
and to protect investors and the public interest by enabling the 
Control Room to turn off RAES to prevent trades based on inaccurate 
market quotes.

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

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

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of CBOE. All submissions 
should refer to file number SR-CBOE-95-06 and should be submitted by 
March 16, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\2\

    \2\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4401 Filed 2-22-95; 8:45 am]
BILLING CODE 8010-01-M