[Federal Register Volume 62, Number 109 (Friday, June 6, 1997)]
[Notices]
[Pages 31184-31186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14764]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38702; File No. SR-CBOE-97-22]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Notice of Filing and Order Granting Accelerated Approval of a 
Proposed Rule Change Relating to Enhancements to the Electronic Order 
Routing System

May 30, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 15, 1997, the Chicago 
Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'' or ``SEC'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the CBOE. The Commission is publishing this 
notice and order to solicit comments on the proposed rule change from 
interested persons and to grant accelerated approval of the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1).
---------------------------------------------------------------------------

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

    The CBOE is seeking permanent approval of a pilot program involving 
certain enhancements to the Exchange's electronic order routing system 
(``ORS'').\2\
---------------------------------------------------------------------------

    \2\ The text of the proposed rule change is available for review 
at the Office of the Secretary, CBOE and in the Public Reference 
Room 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 CBOE 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 III below. The CBOE 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

    CBOE is seeking permanent approval of a pilot program concerning 
certain enhancements to ORS. On February 10, 1997, the Commission 
approved the pilot program until May 30, 1997 to allow CBOE the 
opportunity to evaluate the changes and determine whether to implement 
them on a permanent basis.\3\ After over two months of evaluating the 
enhancements under the pilot program, the Exchange has determined to 
seek permanent approval of the changes.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No 38261 (February 10, 
1997), 62 FR 7080 (February 14, 1997)
---------------------------------------------------------------------------

    The Exchange distributed a regulatory circular to its members 
describing the proposed changes, including certain enhancements to ORS, 
and certain limitations that continue to apply to the use of ORS.\4\ 
Specifically, during the pilot program the enhancements have allowed 
the electronic routing and processing of contingency and discretionary 
orders, the recognition by ORS of firm and broker-dealer orders, the 
routing of firm and broker-dealer orders to the Public Automated 
Routing System workstations in the Standard & Poor's 100 Index 
(``OEX'') crowd, and the execution of certain contingency orders on the 
Exchange's Retail Automatic Execution System, as further explained 
below.
---------------------------------------------------------------------------

    \4\ Notice of the effectiveness of the pilot program was 
presented to the CBOE membership in Regulatory Circular RG97-18 
(February 7, 1997).
---------------------------------------------------------------------------

    There are four possible destinations for an ORS order: (1) the 
Retail Automatic Execution System (``RAES''), (2) the Electronic Book 
(``EBOOK''), (3) the Public Automated Routing System (`PAR'') and Floor 
Broker Routing, and (4) a firm's booth. Before instituting the pilot 
program, the Exchange completed systems enhancements to ORS, resulting 
in electronic routing and processing of contingency and discretionary 
orders and the acceptance of firm and broker-dealer orders as valid 
origin types. Specifically, the enhancements have allowed for the 
routing of the following types of contingency and discretionary orders: 
All or None orders (AON), Immediate or Cancel orders (IOC), Fill or 
Kill orders (FOK), Minimum Quantity orders (MIN), Stop orders (STP), 
Stop Loss orders (STP LOSS), Opening Only orders (OPG), Market on Close 
Orders (MOC), Closing Only orders (CLO), Market if Touched orders 
(MIT), Not held orders (NH), and With Discretion orders. Due to system 
and administrative limitations, ORS has continued to be unavailable for 
stop limit orders as well as spreads, straddles, combos, and other 
multi-part orders.
    The Exchange notes that there have been a number of practical 
results from these systems enhancements for customers, for brokers, and 
for the Exchange. As a result of these changes, customer orders that 
are otherwise RAES eligible market and marketable limit orders tagged 
with AON, IOC, FOK, or MIN have been executed on RAES. For MIN orders, 
the total order quantity must be within the RAES volume. The Exchange 
believes the system enhancements have also had the effect of improving 
the efficiency of reporting and the accuracy of audit trails for firm 
and broker-dealer orders because these orders now have an ORS-id. In 
addition, the Exchange has enabled the system to actually route firm 
and broker-dealer orders electronically to the PAR workstations in OEX. 
In order to determine the affect of the routing of firm and broker-
dealer orders, the Exchange has determined to allow the routing of such 
orders to PAR stations at the OEX trading stations. The Exchange 
believes that there is a possibility that the routing of broker-dealer 
and firm orders to the PAR stations could in busy times slow the 
processing of orders of public customers. The continued restriction of 
the system to route broker-dealer and

[[Page 31185]]

firm orders to the PAR stations (other than in OEX) reflects the 
Exchange's desire to ensure the quickest access to its systems to the 
orders of public customers. The Exchange intends to study further 
whether it should enable the system to route such orders to equity and 
Standard and Poor's 500 Index (``SPX'') crowds at some future date.
    During the pilot program, the Exchange found that the system 
enhancements provided for more efficient processing of trades because 
they allow for electronic fill and cancel reporting to the originating 
customer destination. In addition, the fill reports automatically 
generate an electronic trade match entry. The system enhancements also 
have provided parameter controls so that different order types can be 
selectively crowd routed at the member firm's option. The flexibility 
also allows the firms to change the routing depending upon the market 
circumstances.
    Because the system enhancements to the Exchange's ORS have allowed 
the electronic processing and routing of a greater number of order 
types and because the enhancements have provided greater flexibility 
for member firms in the routing of their orders, the Exchange believes 
the proposed rule change seeking permanent approval of the ORS system 
enhancements is consistent with and furthers the objectives of Section 
6(b)(5) of the Act.\5\ Specifically, the Exchange believes permanent 
approval of the enhancements would foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, and processing 
information with respect to, and facilitating transactions in 
securities, and would remove impediments to and perfect the mechanism 
of a free and open market in a manner consistent with the protection of 
investors and the public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. Sec. 78f(b)(5).
---------------------------------------------------------------------------

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

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

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

    Comments were neither solicited nor received.

III. 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-97-22 and should be 
submitted by June 27, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The CBOE requests that the Commission approve the proposal on an 
accelerated basis pursuant to Section 19(b)(2) of the Act.\6\ The CBOE 
states that the enhancements made to the order routing system have been 
operating on a pilot basis since February 4, 1997. The Exchange 
believes that the system enhancements to the ORS have been operating 
efficiently, and that it will further the protection of investors and 
the public interest to approve the pilot program on a permanent basis. 
The Exchange further notes that the proposed enhancements to ORS have 
already been subject to the full 21-day comment period pursuant to the 
February 10, 1997 notice.\7\ Finally, the Exchange believes that the 
proposal does not present any novel or unique regulatory issues, and 
accordingly should be approved on an accelerated basis to ensure the 
uninterrupted continuation of the system changes made pursuant to the 
pilot program.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. Sec. 78s(b)(2).
    \7\ See supra note 3.
---------------------------------------------------------------------------

    The Commission finds CBOE's proposed rule change consistent with 
the Act and the rules and regulations promulgated thereunder. 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5),\8\ in that it is designed, among other 
things, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating , 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. Sec. 78f(b)(5).
    \9\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. Sec. 78c(f).
---------------------------------------------------------------------------

    As a general matter, the Commission encourages the exchanges to 
pursue enhancements to their electronic order routing systems that will 
result in efficient routing, execution, and processing of eligible 
orders, and at the same time maintain a fair and orderly market. The 
Commission believes that the enhancements to CBOE's ORS set forth 
herein, provide a reasonable response to this goal.
    The Commission believes that the enhancements to ORS should help to 
benefit investors by providing an efficient means to promptly execute 
contingency orders that are otherwise RAES-eligible public customer 
orders. The Commission also believes it is reasonable that the 
enhancements allow for the recognition of firm and broker-dealer orders 
for electronic routing, execution, and processing.\10\ The Commission 
notes that the Exchange has limited the access to the PAR workstations 
of broker-dealer and firm orders via the Exchange's ORS to OEX orders 
only. If the Exchange wishes to make PAR workstations in other trading 
crowds available to firm and broker-dealer orders entered through the 
Exchange's ORS, it my require a proposed rule change pursuant to 
Section 19(b) of the Act. The Commission believes that the Exchange 
should notify the Commission's Division of Market Regulation to 
determine if a 19(b) rule filing is necessary.
---------------------------------------------------------------------------

    \10\ The Commission notes that firm and broker-dealer orders are 
not, in any form, eligible for executions through RAES.
---------------------------------------------------------------------------

    The Commission notes that the purpose of the pilot program was to 
demonstrate that the enhancements accomplished the intended purpose and 
did not impose unnecessary burdens on market participants. The Exchange 
represents that it has evaluated the enhancements for over a two month 
period and has not identified any problems with its operations, nor has 
the Exchange notified the Commission of any problems. Based on the 
representations of CBOE, the Commission believes that it is reasonable 
to permanently approve the Exchange's proposed enhancements to its 
order routing system, because there is no benefit to investors or the 
public

[[Page 31186]]

interest to continue the operation of the system enhancements on a 
pilot basis.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission believes it is 
appropriate to approve the proposed rule change on an accelerated basis 
so that the Exchange can continue to provide, on an uninterrupted 
basis, the enhancements to ORS described herein. The Exchange filed a 
proposed rule change seeking comment on the pilot program and no 
adverse comments were received.\11\ The Commission again notes that the 
Exchange has evaluated the enhancements during the pilot and has not 
identified any problems with its operation, nor has the Exchange 
notified the Commission of any problems. For these reasons, the 
Commission believes that proposed rule change is appropriate and 
consistent with Sections 19(b)(2) and 6(b)(5) of the Act, and 
therefore, is approving the proposed rule change on an accelerated 
basis.
---------------------------------------------------------------------------

    \11\See supra note 3.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (Filed No. SR-CBOE-97-22) be, 
and hereby is, approved on an accelerated basis.

    \12\ 15 U.S.C. Sec. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3 (a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14764 Filed 6-5-97; 8:45 am]
BILLING CODE 8010-01-M