[Federal Register Volume 62, Number 81 (Monday, April 28, 1997)]
[Notices]
[Pages 22982-22983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10795]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38535; File No. SR-CBOE-96-68]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
RAES Orders That Are Re-routed to the Exchange's Order Routing System

April 21, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 12, 1996, 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 II below, which Items have been prepared 
by the self-regulatory organization.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On February 28, 1997, the Exchange filed an amendment to the 
rule proposal. See letter from Timothy Thompson, Senior Attorney, 
CBOE, to Janice Mitnick, Attorney, Division of Market Regulation, 
Commission, dated February 28, 1997 (``Amendment No. 1''). Amendment 
No. 1 made several changes to the rule proposal in order to clarify 
the scope of the rule filing and to conform the rule language to 
reflect the clarifications.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add an interpretation to its Retail 
Automatic Execution System (``RAES'') rule for equity options that 
specifies the trading crowd's firm quote obligation for RAES orders 
that get re-routed through the Exchange's Order Routing System. Also, 
the Exchange proposes to add a rule change clarifying when an order 
reaches the trading station for purposes of the firm quote rule. 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, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change, and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to specify the trading 
crowd's firm quote obligation for RAES orders that get re-routed 
through the Exchange's Order Routing System (``ORS''). Also, this rule 
change clarifies the time at which an order reaches the trading station 
for purposes of the Exchange's firm quote rule.
    Generally, under ordinary trading conditions, only customer market 
or marketable limit orders are eligible to be routed to RAES. When RAES 
receives such 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 to the system. A buy order will pay the 
offer and a sell order will sell at the bid. A market-maker who is 
participating in the RAES system will be designated as contra-broker on 
the trade.
    In situations in which the prevailing market bid or offer is equal 
to the best bid or offer on the Exchange's books, the RAES order 
generally will be re-routed away from RAES on ORS, under the existing 
ORS parameters.\4\ This is done because the Exchange's rule governing 
priority of bids and offers, Rule 6.45, gives priority to orders on the 
customer limit order book over any other order at the post. Therefore, 
a RAES sell order cannot be filled by the RAES system at a price lower 
than or equal to the best book bid and a RAES buy order cannot be 
filled by the RAES system at a price higher than or equal to the best 
book offer. When the RAES order is re-routed over the ORS, such an 
order ordinarily will be routed to a Floor Broker in the crowd via a 
printer or PAR terminal, or will be routed to the firm's booth. Whether 
the order gets routed to the booth or to the trading station is 
determined by the order routing instructions the broker's firm provides 
to the Exchange. Once the Floor Broker receives the order, it is his 
responsibility to represent the order in the crowd.
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    \4\ Rule 6.8(b) provides an exception to this rule for options 
on IBM and other option classes following the determination of 
special market conditions. See Rule 6.8(b).
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    Because these re-routed RAES orders. (``RAES kickouts'') are 
generally customer orders for ten contracts or less, they are 
ordinarily eligible for firm quote treatment under Rule 8.51.\5\ Rule 
8.51(a)(1) states that a trading crowd is required to sell (buy) at 
least ten contracts at the offer (bid) which is displayed when a buy 
(sell) customer order ``reaches the trading station where the 
particular option contract is located for trading.'' Because the 
trading crowd will be expected to fill the first order at the price 
that existed when the RAES order was re-routed to the trading station, 
it is important that the Floor Broker represent the order in a timely 
fashion. Ordinarily, the Exchange interprets the phrase ``when the 
order reaches the trading station'' to mean when the order is 
represented in the crowd by a Floor Broker. The Exchange proposes to 
incorporate this interpretation into Rule 8.51(a)(2).
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    \5\ In some instances, the firm quote obligation for a 
particular option may be for other than ten contracts. See Rule 
8.51(a).
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    In the cases of RAES kickouts that are routed directly to the 
trading station, however, the Exchange believes that a public customer 
should be entitled to have the order filled at the bid or offer that 
existed at the time the order was entered into the RAES system, i.e., 
the price the order would have received had it traded directly with the 
book.\6\ The Exchange does not believe a public customer should have to 
take the risk that the price will move against it in the period between 
the time the order gets re-routed and the time the Floor Broker 
actually represents the order in the crowd.\7\ The Exchange takes this 
view because, in the case of RAES kickouts,

[[Page 22983]]

the customer sending an order to the Exchange will have done nothing 
different and would have no different expectations than any other RAES 
customer whose order was not re-routed from RAES. The factor that 
determines whether an order gets re-routed, the fact that the 
prevailing market bid or offer matches the bid or offer on the book, is 
outside of the customer's control and is not likely to be known by the 
customer.
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    \6\ If the market price is better than the guaranteed RAES 
kickout price when the order is represented in the crowd, pursuant 
to Rule 6.73, the RAES kickout order would be filled at the market 
price. See Amendment 1, p. 2.
    \7\ In the case of an order that the firm has chosen to route to 
the firm's booth, the Exchange does not believe the trading crowd 
should bear the risk that the price will move away from the price 
that the customer could have received had the order not been re-
routed, because of the potentially greater delay in the order being 
represented to the crowd. In these cases, the Floor Broker will be 
responsible for ensuring that the customer's order is represented in 
a timely fashion.
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    The new proposed RAES kickout price guarantee will cover only the 
``first order'' which is kicked out of RAES. The ``first order'' is 
defined as the first order re-routed at a particular market.\8\ It 
should be noted that if more than one RAES order is re-routed at 
approximately the same time and at the same market, the rule change 
does not guarantee that the second order will be filled at the price 
that existed at the time of the second order's entry into the RAES 
system. The price at which the second or any subsequent RAES kickout 
order would be filled may be better or worse than the price at which 
the first RAES kickout order for up to ten contracts was filled. 
Consistent with the terms of Rule 8.51, the trading crowd would be 
entitled to change the quotes after the first order of up to ten 
contracts had been traded at that price.
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    \8\ See Amendment 1, p.1.
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    The Exchange believes that it is appropriate to extend the price 
guarantee for the first RAES kickout order only.\9\ The Exchange notes 
that most RAES kickout situations involve only one order which is 
kicked out of RAES. Thus, the limit of the guarantee to the first order 
is not an issue in those situations. Additionally, in situations where 
there is more than one kickout at a certain price, the market in these 
options is likely very busy and floor brokers may as a practical matter 
be incapable of representing these kicked out orders immediately. In 
proposing to limit the guarantee to the first order, the Exchange 
weighed the benefits of this guarantee against the potential disruptive 
effect of numerous orders kicked out of RAES within a second or two of 
each other. If the guarantee were extended to all orders that are 
rejected at that price, the market-makers would be forced to fill these 
customer orders at quotes that might no longer reflect current market 
situations by the time the floor broker was able to represent the 
orders. In any event, the orders that do not get filled at the 
guaranteed RAES kickout price will be entitled to be filled at the 
disseminated market quotes at the time they are represented in the 
crowd, which may be better than the guaranteed RAES kickout price.\10\
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    \9\ See Amendment 1, p.2.
    \10\ See Amendment 1, p.2.
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2. Statutory Basis
    By clarifying the terms of one current rule and changing another 
rule to add further protections to public customer orders, the proposed 
rule furthers the objectives of Section 6(b)(5) of the Act in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and to protect investors and the 
public interest.

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

    The Exchange states that it believes that the proposed rule change 
will impose no 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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-96-68 and 
should be submitted by May 19, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10795 Filed 4-25-97; 8:45 am]
BILLING CODE 8010-01-M