[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Notices]
[Pages 69696-69699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33365]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40780; File No. SR-CBOE-98-48]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendments Nos. 1 and 2 by the Chicago Board Options
Exchange, Inc. Relating to the Exchange's Rapid Opening System (ROS)
December 10, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 4, 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 December
9, 1998, the CBOE filed Amendment No. 1 to the proposed rule change
with the Commission.\3\ On December 9, 1998, the CBOE also filed
Amendment No. 2 to the proposed rule change with the Commission.\4\ The
[[Page 69697]]
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 204.19b-4.
\3\ In Amendment No. 1, the Exchange replaced its original
proposal. See Letter from Timothy Thompson, Director, Regulatory
Affairs, Legal Department, CBOE, to Michael Walinskas, Deputy
Associate Director, Division of Market Regulation (``Division''),
Commission, dated December 8, 1998 (``Amendment No. 1'').
\4\ In Amendment No. 2, the Exchange corrected technical errors
in the notice. See Letter from Timothy Thompson, Director,
Regulatory Affairs, Legal Department, CBOE, to Michael Walinskas,
Deputy Associate Director, Division, Commission, dated December 8,
1998 (``Amendment No. 2''). Additional technical amendments
corrected errors in the proposal. Telephone conversations between
Timothy Thompson, Director, Regulatory Affairs, Legal Department,
CBOE, and Kenneth Rosen, Attorney, Division, Commission (December
10, 1998).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to adopt new CBOE Rule 6.2A, Rapid Opening
System, and a related rule change to CBOE Rule 6.2 to govern the
operation of, and the eligibility to participate in, the Exchange's new
Rapid Opening System.
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 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 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 adopt rules to govern
the operation of, and the eligibility to participate in, the Exchange's
new Rapid Opening System (``ROS''). ROS will provide the Exchange the
ability to automate the opening of its various option classes, thereby
avoiding the lengthier opening rotations that can occur under the
present circumstances when there is a large influx of orders entered
before or during the opening rotation. As the opening occurs, fill
reports on all participating orders will be generated automatically and
immediately, opening market quotes and last sales will be disseminated,
and market-makers will receive notification of assigned trades.
By entering into open trading more quickly using ROS (and nearly
instantaneously in many circumstances), the Exchange believes that its
customers will be better served by being able to have their orders
addressed in open trading in a more timely manner. Under the current
circumstances, in those situations where there is a longer than normal
opening rotation, orders entered after the opening rotation begins are
locked out and these orders become subject to substantial market risk
as the quotes may change from the time the series is opened to the time
the rotation is completed. ROS should provide the Exchange's market-
makers with the ability to open option classes within seconds of the
opening of the underlying security.
Availability of ROS. ROS may be used to open a class of options at
the beginning of the day and it may be used to re-open a class of
options during the trading day e.g., following a trading halt. The
appropriate Floor Procedure Committee (``FPC'') for each option class
traded on the floor will determine to what extent ROS will be
available, although it is anticipated that ROS will be nearly
universally available on the floor and will be used routinely. Because
the initial version of ROS will employ the Exchange's AutoQuote system,
only those option classes that employ the AutoQuote system may use ROS
initially. While most option classes on the floor use the Exchange's
AutoQuote system, certain index options (including DJX, NDX, and OEX
\5\) and classes traded at certain Designated Primary Market Maker
(``DPM'') trading stations do not currently employ the Exchange's
AutoQuote system. Those DPMs that do not use the Exchange's AutoQuote
system may decide to do so (or may be required to do so by the
appropriate FPC) at least at the opening to take advantage of ROS.
Later versions of ROS may accommodate inputs from systems other than
the Exchange's AutoQuote system.
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\5\ These are the Dow Jones Industrial Average, Nasdaq-100, and
Standard & Poors 100 index options.
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When ROS is first introduced (currently anticipated to be in
December 1998, pending SEC approval), it may be introduced initially to
a few classes so that the system can be tested. The Exchange expects
ROS to be implemented throughout the floor wherever it may be
accommodated soon after its introduction. Pursuant to its authority
under CBOE Rule 6.2, the appropriate FPC, chairman or designee may
decide where ROS should be used. Once implemented, the Exchange expects
ROS will be used routinely and every day for those option classes where
it is employed. If there remain option classes where ROS can be
employed but is not employed, two Floor Officials may permit an Order
Book Official (``OBO'') to use ROS on a case-by-case basis pursuant to
Interpretation .01(b) of CBOE Rule 6.2.
Obligations and Eligibility of Market-Makers. Each morning the
market-makers who plan to participate on ROS must log onto ROS and
identify the classes of options in which they will participate. If ROS
was being employed in a DPM trading crowd, the DPM would be expected to
participate on ROS. As with RAES, any DPM designee (all of whom are
permitted to act as both market-makers and floor brokers) would be
entitled to log onto ROS and share equally in any imbalance to trade at
the opening price. To participate in the opening, the market-makers
must log in prior to the opening or by some other earlier time
designated by the appropriate FPC. (Similarly, in a delayed opening or
a re-opening during the day, the participating market-makers must be
logged on prior to the operation of ROS or by some earlier time.) Any
market-maker that will be present at a particular trading station for
the opening may log onto ROS for a class traded at that station \6\ but
once a market-maker has logged onto ROS for that class during an
expiration month, that market-maker must log onto ROS any time he is
going to be present in the crowd at the opening during the remainder of
the expiration cycle. This requirement is intended to ensure that those
market-makers who participate in ROS will be obligated to participate
on those more volatile or busy days.
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\6\ Because the openings generally will occur simultaneously, it
will generally be possible to possible on ROS only in those classes
traded at one particular trading station on any given day. A market-
maker is not permitted to log onto ROS for classes at two or more
stations when those openings are expected to occur at approximately
the same time.
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Similar to the Exchange's rules governing the eligibility to
participate on the Exchange's Retail Automatic Execution System
(``RAES''), i.e., CBOE Rule 6.8, there are two other provisions to help
ensure the viability of the system in various market situations. First,
the appropriate Market Performance Committee (``MPC'') may determine to
require a market-maker to log onto ROS for specified classes traded at
a particular trading station.
Second, notwithstanding the limitations in proposed CBOE Rule 6.2A
[[Page 69698]]
requiring the market-maker to be present in the crowd for the opening
and to log onto ROS by a designated time, if insufficient market-maker
participation exists for a particular class, two Floor Officials of the
appropriate MPC will have the authority to log onto ROS those market-
makers who are members of the trading crowd, as defined in CBOE Rule
8.50, or those Floor Officials may allow market-makers in other classes
of options to log onto ROS in such classes.
Participation on ROS will be monitored by the OBOs or DPMs at the
particular trading station. The ROS screen in each trading crowd will
indicate the number of market-makers that have signed onto ROS. If for
any reason the OBO, the DPM, or the participating market-makers believe
that the participation rate is inadequate, then the OBO or DPM may call
Floor Officials to either have them log on other market-makers or
conduct an opening rotation under the manual procedures employed
currently.
Participation Rate for ROS. ROS will be designed to assign the
contracts to trade for a particular class equally among all
participating market-makers for that class to the extent possible. For
example, if there are twenty-one contracts for the market-makers who
are logged onto ROS to trade after the customer orders have been
crossed and there are four market-makers logged onto ROS for that
class, then three market-makers would be assigned five contracts and
the fourth market-maker would be assigned six contracts.
Orders Participating on ROS and in the Opening. When ROS is
employed, all pre-open orders that are routed to the Exchange's
Electronic Book will participate automatically in the opening process.
All customer orders (both markets and limit orders) without
contingencies are eligible to be placed on the Electronic Book prior to
the opening. Orders that cannot be placed on the Electronic Book,
including broker-dealer and customer contingency orders will be
accommodated in the opening manually.
To entitle these orders to participate, the brokers representing
these orders must inform the OBO or DPM and the logged-in ROS market-
makers of the terms of the order (including limit price and volume)
prior to the opening bell or by some earlier time as established by the
appropriate FPC. This notification will enable the quantity of orders
and any imbalance they represent to be taken into account in
establishing the opening price as described below. Although these
orders will not be represented in the ROS algorithm (discussed further
below), the market-makers will be able to consider the effect of those
orders when they decide whether to adjust their AutoQuote values. Once
ROS determines the opening price, the participating market-makers will,
as described below, trade at the opening price electronically with the
imbalance of the booked orders and via open outcry with non-bookable
orders that are deserving a fill \7\ at the same opening price. The
Exchange anticipates that a futrue release of ROS will incorporate non-
bookable orders electronically. The Exchange notes that there are few
broker-dealer orders entered prior to the opening today and the
Exchange believes this is likely to be true when ROS is employed on the
floor.
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\7\ These procedures were designed to ensure an order is filled
under proposed CBOE Rule 6.2A as if the standard opening procedures
were in place. A non-bookable order will be filled by market-makers
in the crowd if it is a (1) market order; (2) limit order and the
limit price betters the opening price, or (3) limit order and the
limit price equals the opening price and equals or exceeds the
opposite side of the AutoQuote bid and offer (as it may have been
adjusted by the market-makers) that is submitted to ROS. If the non-
bookable order is a limit order and the limit price equals the
opening price and is between the AutoQuote bid and offer, then this
order may be filled against any orders in the Exchange's book.
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Operation of ROS. To determine a single opening price, AutoQuotes
for all series will be provided to ROS. Generally, one participating
market-maker will determine the variables that will determine the
AutoQuote values. However, any participating market-maker will have the
opportunity to improve individual quotes before the AutoQuotes values
are sent to ROS. ROS will not open a class until it has received
AutoQuotes for all eligible series. The market-makers participating in
ROS for a particular option class will determine collectively when they
will send the AutoQuote values to ROS. In making this determination,
the participating market-makers will have access to information that
indicates the total contracts that would be traded on the opening just
as do specialists on other exchanges in setting their opening prices
today. The information will be available on a screen at each trading
station that employs ROS. Each screen will provide the following
information: the number of market-makers logged onto ROS for the class,
the total delta of all the orders in a particular class of options, the
total contracts to trade, the last sale price of the underlying, the
AuteQuote calculation values for the underlying. Individuals at the
trading station can also access a detail screen that provides
information on the number of long and short contracts to trade on a
series basis, series AutoQuote values, contracts to trade on a series
basis, total delta on a series basis, and thresholds for the class.
Before the start of the trading day, participating market-makers,
who together share the obligation to trade at the opening price, will
have established thresholds for the aggregate risk and aggregate number
of contracts to trade they as a group are willing to assume for a
particular class. If the actual aggregate risk and number of contracts
to trade at the opening are both below these established thresholds,
ROS will automatically open that particular class without any further
intervention by the market-makers once AutoQuote has received input of
the underlying stock value. In these cases, the opening quotes and last
sales will be disseminated immediately. In those cases whether either
the aggregate risk or the aggregate contracts to trade exceed the
established thresholds, a participating market-maker may manually
adjust the AutoQuote values as is done under the opening rotations
currently.
To adjust the AutoQuote values, a participating market-maker must
touch a button to ``lock'' the particular class. The ``lock'' feature
allows market-makers to adjust the AutoQuote values to account for the
risk in the positions and contracts to trade, while incoming orders
queue (just as orders queue during opening rotations today). Those
orders entered during the ``lock'' will not be eligible to participate
in the opening. The Exchange expects that the lock feature generally
only will be used for very brief periods. Once the market-makers have
adjusted AutoQuote, they will send the values of ROS and the class will
open. ROS should allow the Exchange to transition into open trading
much faster than under the current system and the backlog of orders
that sometimes develops during the opening should rarely, if ever,
occur.
In both those cases in which the opening is automatic and in those
cases where market-makers adjust the AutoQuote values while a class is
locked, the actual single opening price that ROS calculates for each
series will be determined based upon the bid/ask values sent from
AutoQuotes (as they may be adjusted by the market-makers) and the
orders contained in the book. The exact price will be sent according to
an algorithm, or a set of rules coded into the system, designed to
maximize the number of customer orders able to be traded at or between
the bid-ask values.\8\ Once the price is determined,
[[Page 69699]]
all customer orders that should be crossed at that opening price will
be crossed, while the balance of orders, if any, will be assigned to
participating market-makers if the opening price is at either the
AutoQuote bid or offer. If the opening price is between the AutoQuote
bid or offer, then no trades will be assigned to participating market-
makers. However, any orders that are not executed as part of the
opening will remain in the Exchange's Electronic Book and will be
reflected in the opening bid or offer improving the AutoQuote bid or
offer. Non-bookable orders that were presented to the OBO or DPM prior
to the opening in accordance with proposed CBOE Rule 6.2A(a)(ii) will
be filled by the market-makers in the crowd at the opening price if the
order is deserving of such price. As ROS completes the opening for each
class, public customers will receive an electronic fill report for each
order traded, quotes and last sales will be disseminated to Options
Price Reporting Authority, market-makers will be informed of their
participating via an electronic trade notification or a paper notice,
and trade match records will be created for clearance.
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\8\ The algorithm looks for the maximum number of orders to
trade at the QutoQuote bid or offer or at any price in between. The
rules, which the system proceeds through in the following order,
are:
(1) If there are more contracts to trade at the bid price than
at any other price point, then the opening price will be set at the
bid price. If the bid equals, 0, then use the zero bid rule. This
rule states if there is a net to sell at 0, any buy volume will be
crossed at \1/16\ with the available sell volume. If there is a
balance remaining to sell, the sell volume will be booked at \1/16\.
If there is no buy volume, then, as with the current EBook
functionality, there are 0 to sell at \1/16\ and the orders will be
booked at \1/16\.
(2) If there are more contracts to trade at the offer price than
at any other price point, then the opening price will be set at the
offering price.
(3) If neither (1) nor (2) is satisfied, then look for the other
price point at which the maximum number of contracts will be traded.
(4) There may be no contracts to trade at any of the price
points.
(5) If there is only one price point at which the maximum number
of contracts may be traded, then open at that price point.
(6) If there are multiple price points at which the maximum
number of contracts may be traded then follow rules 7 through 10.
(7) If there is only one price point at which the net between
number of contracts to buy and sell is 0 and at which the maximum
number of contracts can be traded, then open at that price point.
(8) If there are multiple points where the net between buys and
sells is 0 and at which the maximum number of contracts can be
traded, then calculate what the best quote will be coming out of
rotation, and open at the net zero point closest to the midpoint of
the best quote.
(9) If there is not a single net zero closest to the midpoint of
the best quote, then use the net change rule (discussed below) to
determine the opening price.
(10) If there are no points where the net between buys and sells
is zero and at which the maximum number of contracts can be traded,
then open at a price at which the maximum number of contracts can be
traded and where the net between buys and sells is greater than zero
but less than or equal to the total buys or sells at that price. Use
the net change rule if necessary.
Net change rule: If the direction of the last underlying change
is positive and the option is to a call, open at the higher price,
and if it is a put, open at the lower price. Similarly, for negative
change, if it is a call option open at the lower price and if it is
a put option, open at the higher price.
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Surveillance of Market-Maker Procedures. The market-maker
participating on ROS will be required to price the contracts fairly, in
a manner consistent with their obligations under CBOE Rule 8.7(b)(iv).
The Exchange believes that a number of factors including scrutiny by
customers and firms representing customer orders will ensure that
market-makers adjust the AutoQuote values consistent with their
obligations. In addition, if an OBO notices any unusual activity in the
setting of AutoQuote values, the OBO will fill out an OBO Unusual
Activity Report which will be investigated by the Exchange. Finally,
the Exchange's AutoQuote has an audit trail log that details every key
stroke employed in the use of AutoQuote. This audit trail report can be
studied in the event of any concerns with the way the AutoQuote values
were established for ROS.
2. Statutory Basis
The proposed rule changes are consistent with Section 6(b) of the
Act in general and further the objectives of Section 6(b)(5) in
particular in that they are designed to promote just and equitable
principles of trade and to protect investors and the public interest.
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 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, 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, 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. 552, will be available for inspection and copying in the
Commission's 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-98-48 and should
be submitted by January 7, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33365 Filed 12-16-98; 8:45 am]
BILLING CODE 8010-01-M