[Federal Register Volume 63, Number 98 (Thursday, May 21, 1998)]
[Notices]
[Pages 28019-28020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13501]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39992; File No. SR-CBOE-98-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to the Automatic Execution of Small Retail 
Orders in Equity Options

May 14, 1998
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, notice is hereby given that on April 6, 1998, the 
Chicago Board Options Exchange, Inc.,(``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items, I, II, and III below, which 
Items have been prepared by the CBOE. On May 13, 1998, the CBOE 
submitted to the Commission Amendment No. 1 to the proposed rule 
change.\2\ 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. 78s(b)(1).
    \2\ In Amendment No. 1, the Exchange clarifies the operation of 
the proposed rule change. More specifically, the Amendment explains 
the process of designating options to which the proposed automatic 
execution feature applies as well as reasons for suspending the new 
feature. See Letter from Timothy Thompson, Director, Regulatory 
Affairs, Legal Department, CBOE, to Ken Rosen, Attorney, Division of 
Market Regulation, Commission, dated May 11, 1998 (``Amendment No. 
1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes amend CBOE Rule 6.8 and Interpretation and Policy 
.02 thereunder to provide added flexibility to the Exchange's Retail 
Automatic Execution System (``RAES'') where the best bid or offer on 
the Exchange for a given equity option is inferior to the best bid or 
offer for the same option in another market where the option is traded.
    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 CBOE included statements 
concerning the purpose of and basis for 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 aspects 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 provide for the 
automatic execution on RAES of eligible retail orders to buy or sell 
equity options at a price that may be one tick better than the best 
price currently quoted on the Exchange if the better price is then 
being quoted in another market where the same options are traded. Under 
existing CBOE Rule 6.8(a)(ii), the execution price automatically 
attached to an equity option order executed in RAES is the prevailing 
market quote on CBOE at the time the order is entered into the system. 
If at that same time another market is displaying a better quote for 
the option, under the existing Rules the order is not automatically 
executed, but instead, pursuant to Interpretation and Policy .02 under 
CBOE Rule 6.8, is rerouted for non-automated handling. In most cases, 
especially where the market away from the CBOE is better by only one 
``tick'' (i.e., by one minimum quote interval), the order is usually 
manually executed on CBOE at the better price.
    The proposed rule change will automate the process of filing equity 
option orders through RAES at any better price being quoted in another 
market, so long as the price is better by no more than one tick. If the 
market away from the CBOE purports to be better than the CBOE's quoted 
market by more than one tick, the existing procedure will continue to 
apply whereby the order is rerouted out of RAES to the Designated 
Primary Market Maker or Order Book Official for non-automated handling.
    By automating the execution of eligible retail orders for equity 
options in the manner described above (referred to as ``RAES Auto-Step-
Up''), investors will be assured the prompt, automatic execution of 
these orders at the best available prices, even if those prices are 
being quoted in a market by more than one tick. This proposal should 
minimize the delay inherent in manually handling orders in this 
circumstance, and thereby reduce the risk to investors that, as a 
result of an adverse move in the market while their orders are being 
manually handled, they may receive an inferior execution.
    The Exchange continues to believe that manual handling is called 
for where prices apparently quoted in other markets are more than one 
tick better than the Exchange's best quotes, because the quotes in 
other markets may be displayed in error or may otherwise not be likely 
to be available, and because even if Exchange market makers determine 
to provide an execution at such better prices, this decision should be 
made on a case-by-case basis by the market makers rather than 
automatically. In addition, the proposed rule change authorizes the 
Chairman of the appropriate Floor Procedure Committee or his or her 
designee to disable RAES Auto-Step-Up for specified classes or series 
of options or in respect of specified markets when such action is 
deemed to be warranted by circumstances or conditions applicable to 
such options or markets. This authority would be expected to be 
exercised in circumstances such as communication or system problems, 
fast markets, and similar situations that could make quotes unreliable.
    While the Exchange expects that eventually the Floor Procedure 
Committees will determine to apply the RAES Auto-Step-Up to all or 
nearly all option classes traded on the floor, the proposed rule change 
would permit the program to be initiated on a class by class or trading 
station by station basis.\3\ To provide for the orderly introduction of 
this change to the exchange's RAES procedures and to measure its effect 
before expanding it to equity options floor-wide, the Exchange intends 
to introduce the change RAES procedure to selected classes of equity 
options during an initial evaluation period, and then over time to 
expand the changed procedure to cover a larger number of equity options 
unless, upon evaluation, such expansion appears not to be warranted. 
Members will be given

[[Page 28020]]

advance notice of each class of options to which these revised 
procedures apply.
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    \3\ See Amendment No. 1.
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    By enhancing the ability of eligible retail orders in multiply-
traded options to receive best execution, the Exchange believes the 
proposed rule change will promote just and equitable principles of 
trade and protect investors and the public interest, in furtherance of 
the objectives of Section 6(b)(5) of the Act.

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

    The 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 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, including whether the proposed rule 
change is consistent with the Act. 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 
Commissions, Public Reference Room. 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-98-13 and should 
be submitted by June 11, 1998.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-13501 Filed 5-20-98; 8:45 am]
BILLING CODE 8010-01-M