[Federal Register Volume 64, Number 32 (Thursday, February 18, 1999)]
[Notices]
[Pages 8156-8160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3958]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41033; File No. SR-CBOE-98-48]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 3 and 4 To Proposed Rule Change By the Chicago Board
Options Exchange, Inc. Relating to the Exchange's Rapid Opening System
February 9, 1999.
I. Introduction
On November 4, 1998, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to implement a new Rapid Opening
System (``ROS''). On December 9, 1998, the CBOE filed Amendment Nos. 1
and 2 to the proposed rule change.\3\ The proposed rule change, as
amended, was published for comment in the Federal Register on December
17, 1998.\4\ The Commission received no comments regarding the
proposal. On January 15, 1999, the CBOE filed Amendment No. 3 to the
proposed rule change.\5\ On February 9, 1999, the CBOE filed Amendment
No. 4 to the proposed rule change.\6\ This order approves the proposed
ROS pilot until March 31, 2000, as amended. In addition, the Commission
is publishing this notice to solicit comments on Amendment Nos. 3 and 4
to the proposed rule change and is simultaneously approving Amendment
Nos. 3 and 4 on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange replaced its original
proposal. See Letter from Timothy Thompson, Director, Regulatory
Affairs, Exchange, to Michael Walinskas, Deputy Associate Director,
Division of Market Regulation (``Division''), Commission, dated
December 8, 1998 (``Amendment No. 1''). In Amendment No. 2, the
Exchange corrected technical errors in the proposal. See Letter from
Timothy Thompson, Director, Regulatory Affairs, Exchange, to Michael
Walinskas, Deputy Associate Director, Division, Commission, dated
December 8, 1998 (``Amendment No. 2'').
\4\ Securities Exchange Act Release No. 40780 (December 10,
1998), 63 FR 69696.
\5\ In Amendment No. 3, the Exchange clarified the operation of
the new electronic system. See Letter from Timothy Thompson,
Director, Regulatory Affairs, Legal Department, exchange, to Michael
Walinskas, Deputy Associate Director, Division, Commission, dated
January 13, 1999 (``Amendment No. 3'').
\6\ In Amendment No. 4, the Exchange further clarified the
conduct of openings and priority under the new system and its
intention to implement the system on a pilot basis. See Letter from
Timothy Thompson, Director, Regulatory Affairs, Legal Department,
Exchange, to Michael Walinskas, Deputy Associate Director, Division,
Commission, dated February 9, 1999 (``Amendment No. 4'').
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II. Background
Some variation exists as to how different trading crowds on the
CBOE handle opening rotations today, but generally a crowd conducts a
reverse rotation under which it opens further out series first and
nearer term series later.\7\ Once a trading crowd sets the quotes for a
particular series, the series will automatically lock in the Exchange's
Electronic Book if there are market orders, or limit orders between the
bid/ask. In an Order Book Official (``OBO'') crowd,\8\ floor brokers
and OBOs then announced their respective positions to the crowd for
final price discovery. That particular series remains locked until the
opening price is manually entered by the book staff. Open trading for
the series, however, does not commence until all series in the class
have undergone these same opening price discovery procedures. Depending
on the volatility in the marketplace and the number of orders received,
an opening rotation may take anywhere from a few minutes to a half hour
to complete. During the rotation, new orders queue up and cannot be
addressed until open trading begins. In light of such delays, the
Exchange now proposes to conduct its opening electronically through
ROS. The Exchange believes that ROS should allow the Exchange to
transition into open trading much faster than under the current system
and that the backlog of orders that sometimes develops during the
opening should rarely, if every, occur.
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\7\ See Amendment No. 3.
\8\ The CBOE also uses Designated Primary Market Maker (``DPM'')
crowds, where DPMs conduct some of the functions otherwise performed
by an OBO.
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III. Description of the Proposal
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
ROS. ROS would allow the Exchange to automate the opening of 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 would be generated
automatically and immediately, opening market quotes and last sales
would be disseminated, and market-makers would receive notification of
assigned trades.
Because the new system allows quicker entry into open trading, the
Exchange believes that ROS would serve all market participants.
Currently, orders entered after the opening rotation begins are locked
out. Such orders become subject to market risk as the quotes may change
from the time the series is opened to the time the rotation is
completed. The CBOE believes that ROS should enable the Exchange's
market-makers to open option classes within seconds of the underlying
security's opening.
Availability of ROS
The Exchange intends to introduce ROS to a few classes to test the
proposed new system. The Exchange expects that soon after its
introduction ROS will be implemented throughout the floor, wherever it
may be accommodated. Pursuant to its authority under CBOE Rule 6.2, the
appropriate Floor Procedure Committee (``FPC''), chairman, or designee
may decide where ROS should be used. Once implemented, the Exchange
expects ROS will be used routinely and daily for
[[Page 8157]]
those option classes where it is employed.\9\
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\9\ Under the proposal, two Floor Officials may permit an OBO or
DPM to use ROS on a class-by-class basis pursuant to Interpretation
.01(b) of CBOE Rule 6.2.
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ROS could be used to open a class of options at the beginning of
the day and under certain circumstances (e.g., following a trading
halt) to re-open a class of options during the trading day. The
appropriate FPC for each option class traded on the floor would
determine the availability of ROS. Because the initial version of ROS
employs the Exchange's AutoQuote system (``AutoQuote''), only those
open classes that employ AutoQuote may use ROS initially. While most
option classes on the floor use AutoQuote, some index options
(including DJX, NDX, and OEX \10\) and classes traded at certain DPM
trading stations do not currently employ AutoQuote. To allow the use of
ROS, DPMs, that do not use AutoQuote may decide to do so (or may be
required to do so by the appropriate FPC), at least at the opening.
Later versions of ROS may accommodate inputs from systems other than
AutoQuote.
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\10\ These are the Dow Jones Industrial Average, Nasdaq-100, and
Standard & Poor's 100 index options.
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Operation of ROS
To determine a single opening price, CBOE market-makers will
provide AutoQuotes for all series 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 AutoQuote 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. 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, and AutoQuote
calculation values for the underlying. Individuals at the trading
station also can 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 threshold for the aggregate risk and aggregate number
of contracts to trade that 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 where 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). 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.\11\ Once the market-makers have
adjusted AutoQuote, they will send the values to Ross and the class
will open.
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\11\ Under ROS, the Exchange expects classes to be locked for no
more than thirty seconds. See Amendment No. 3.
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Regardless of whether market-makers adjust the AutoQuote values,
the single opening price that ROS calculates for each series will be
determined based upon the bid/ask values sent from AutoQuote (as they
may be adjusted by the market-makers) and the orders contained in the
book. The opening price will be set according to an algorithm, or a set
of rules coded into the system, fed by the relevant AutoQuote and order
information.\12\ The CBOE represents that the algorithm was designed to
maximize the number of customer orders able to be traded at or between
the bid-ask values.
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\12\ The algorithm rules, which ROS 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 the ``zero bid rule'' will be
used. This rule states that 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 offering price
than at any other price point, then the opening price will be set at
the offering price.
(3) If neither (1) or (2) is satisfied, then ROS will look for
other price points at which the maximum number of contracts are
priced to 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 ROS will open at that price point.
(6) If there are multiple price points at which the maximum
number of contracts may be traded then ROS will follow rules 7
through 10.
(7) If there is only one price point at which the net between
the number of contracts to buy and sell is 0 and at which the
maximum number of contracts can be traded, then ROS will 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 ROS will 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 point closest to the
midpoint of the best quote, then ROS will 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 ROS will 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 number of
contracts to buy or sell at that price. Use the net change rule if
necessary.
Net change rule: If the direction of the last price change of
the security underlying the option class is positive and the option
is a call, then ROS will open at the higher price. If the option is
a put, ROS will open at the lower price. For a negative change for
the underlying, if it is a call option ROS will open at the lower
price. If it is a put option, ROS will open at the higher price.
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Once ROS determines an opening price, all customer orders that
should be crossed at that opening price will be crossed. Any balance of
orders will be assigned to participating market-makers if the opening
price is at either the AutoQuote bid or offer.\13\ 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. Non-
bookable orders (discussed below) 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.\14\ As ROS completes the
opening for each class, public customers will receive an
[[Page 8158]]
electronic fill report for each order traded. Quotes and list sales
will be disseminated to the Options Price Reporting Authority. Market-
makers will be informed of their participation via an electronic trade
notification or a paper notice, and trade match records will be created
for clearance.
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\13\ If the opening price is between the AutoQuote bid or offer,
then no trades will be assigned to participating market-makers.
\14\ See note 17 infra.
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Obligations and Eligibility of Market-Makers
Each morning market-maker planning to participate on ROS must log
on to ROS and identify the classes of options in which they will
participate. If ROS is being employed in a DPM trading crowd, the DPM
will be expected to participate on ROS. Any DPM designee (all of whom
are permitted to act as both market-maker and floor brokers) would be
entitled to log on to ROS and share equally in any trading imbalance at
the opening price. To participate in the opening, the market-maker must
log on 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-maker 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
on to ROS for a class traded at that station,\15\ but once a market-
maker has logged on to ROS for that class during an expiration month,
that market-maker must log on to 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-maker
who participate in ROS will be obligated to participate on more
volatile or busy days.
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\15\ Because the openings generally will occur simultaneously,
typically it will be possible to participate on ROS only in those
classes traded at one particular trading station on any given day. A
market-maker is not permitted to log on to ROS for classes at two or
more stations when those openings are expected to occur at
approximately the same time.
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Two other provisions are intended to help ensure the viability of
the system in various market situations. First, the appropriate Market
Performance Committee (``MPC'') may require a market-maker to log on to
ROS for specified classes traded at a particular trading station.
Second, notwithstanding the limitations in proposed CBOE Rule 6.2A
requiring the market-maker to be present in the crowd for the opening
and to log on to 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 long on to ROS those market-
makes who are members of the trading crowd, as defined in CBOE Rule
8.50. Those Floor Officials also may allow market-makers in other
classes of options to log on to 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 on to 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 either to have them log on other market-makers or
conduct an opening rotation under the manual procedures currently
employed.
Participation Rate for ROS
ROS will 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, after all customer orders have been
crossed, there remain twenty-one contracts for the market-makers who
are logged on the ROS to trade and there are four market-makers logged
on to ROS for that class, then one market-maker would be assigned six
contracts and the other three market-makers would be assigned five
contracts.
Order 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 market 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 (non-bookable
orders), including broker-dealer and customer contingency orders, will
be accommodated manually in the opening. To entitle a on-bookable order
to participate, the broker representing the order must inform the OBO
or DPM and the market-makers that are logged on to ROS of the terms of
the order (including limit price and volume) prior to the time the
market-makers for a particular class lock that class under ROS. This
notification deadline is the same time at which orders entered on the
book will no longer be accepted in ROS which should help to ensure that
different categories of orders are treated consistently.\16\ This
notification deadline will enable the quantity of orders and imbalance
they represent to be taken into account in establishing the opening
price.\17\ Although these orders will not be represented in the ROS
algorithm, the market-makers will be able to consider the effect of
those orders when they decide whether to adjust their AutoQuote values.
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\16\ See Amendment No. 4.
\17\ In Amendment Nos. 3 and 4, the exchange further explained
the incorporation and execution of non-bookable orders at the
opening. Market-makers will have the opportunity to adjust their
AutoQuote to account for such orders, assisting efforts to price
contracts fairly. See Amendment Nos. 3 and 4. Under certain
circumstances, market-makers must adjust AutoQuote values to account
for one of more non-booked limit orders. Market-makers will be
required to make such adjustments if (i) the limit price of such
non-booked orders is better than the AutoQuote bid or offer (as
appropriate) and (ii) the imbalance of the non-booked orders that
would be traded at such better limit price is equal to or greater
than the imbalance or orders for that series in the book on the
opposite side of the market. See Amendment No. 4.
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Once ROS determines the opening price, the participating market-
makers will 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 \18\ at the same opening
price.\19\ The Exchange anticipates that a
[[Page 8159]]
future 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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\18\ A non-bookable order will be filled for its entire size by
market-makers in the crowd (assuming any contingency accompanying
the order is satisfied) if that order is a (1) market order; (2)
limit order and the limit price betters the opening price; or (3)
customer limit order with a contingency where the limit price equals
the opening price. If the order is a broker-dealer order and the
limit price equals the opening price, the order will be entitled to
be filled up to the lesser of the entire size of such order or an
amount equal to a pro rata share of the orders assigned to the
market-makers by ROS. If a broker holds more than one order to trade
at the same limit price, that broker is nonetheless limited to no
more than one pro rata share of the orders assigned to the market-
makers by ROS. See Amendment No. 4.
Because the operation of ROS makes the application of
traditional time priority rules difficult, the Exchange proposes to
amend its priority rule, CBOE Rule 6.45, to reflect the above-stated
method of filling non-bookable orders. The Exchange explains that
under ROS, brokers are required to present their orders to the
trading crowd before the market-makers finish adjusting the
AutoQuote bid and offer. Notwithstanding the fact that the broker-
dealer's order will always be entered prior to the market-makers's
bid and offer, the Exchange believes that the market-makers must be
able to participate at the opening price even if the opening price
equals the limit price of a broker-dealer order because the market-
makers are the group that ensures liquidity on the opening. See
Amendment No. 4.
\19\ The CBOE provided three scenarios to help illustrate the
interaction of the various rules related to the manual handling of
broker-dealer proprietary orders. For each of these scenarios, a
broker-dealer presents an order to the crowd when the AutoQuote bid/
offer is at 6-6\1/2\ and 4 market-makers are logged on to ROS for
the relevant options class.
Scenario 1: There is no customer order to buy 50 contracts at
the market in the Electronic book; there also is a broker-dealer
order to sell 30 at a limit price of 6\1/8\. In this case, the
market-makers in the crowd would not be expected to adjust their
AutoQuote bid to reflect the broker-dealer bid because the demand to
sell at a better price (30) is less than the supply to buy (50). The
market-makers would sell 50 to the customer in ROS and manually buy
30 from the broker-dealer in the crowd at 6.
Scenario 2: There is one customer order to sell 50 contracts at
the market in the Electronic book; there also is a broker-order to
buy 50 at a limit price of 6\1/8\. In this case, the market-makers
must adjust their AutoQuote bid to reflect the broker-dealer bid
because the supply to buy at a better price satisfies all sellers.
However, the market makers may also adjust the AutoQuote to 6\1/8\
for other reasons, such as a change in volatility. In either case,
the market-makers would buy 50 from the customer in ROS at 6\1/8\.
The market-makers would be required to sell 10 contracts (a pro rata
share) to the broker-dealer at 6\1/8\. It is possible that the
market-makers would fill the entire broker-dealer order at 6\1/8\.
Scenario 3; There is one customer order to sell 50 contracts at
the market in the Electronic book; there also is a broker-dealer
order to buy 50 at a limit price of 6. In this case, if the
AutoQuote values do not change, the market-makers in the crowd would
buy 50 from the customer in ROS at 6. The market-makers would be
required to sell up to 10 contracts (a pro rata share) to the
broker-dealer at 6. See Amendment No. 4.
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Survelliance of Market-Maker Procedures
The market-makers 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). In conjunction with the implementation of
ROS, the Exchange plans to publish the regulatory circular to remind
market-makers of their obligation to set AutoQuote fairly.\20\ 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
obligation. In addition, if an OBO or DPM notices any unusual activity
in the setting of AutoQuote values, the OBO or DPM must 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.
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\20\ See Amendment No. 3.
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Pilot Implementation
ROS would be implemented on a pilot basis through March 31,
2000.\21\
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\21\ See Amendment No. 4.
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IV. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of Section 6 of
the Act. In particular, the Commission believes the proposal is
consistent with Section 6(b)(5) of the Act.\22\ Section 6(b)(5)
requires, among other things, that the rules of the exchange be
designed to remove impediments to and perfect the mechanism of a free
and open market and a national market system and not be designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
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\22\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission
has considered the proposed rule's impact in efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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The proposed rule change represents an effort to facilitate the
execution of orders at the opening by providing market-makers with a
means of establishing electronically a single opening price. ROS
replaces what has become an increasingly cumbersome process of arriving
at the opening price by manually progressing through series after
series of an options class. Significantly, until this process is
completed for an options class, open trading generally does not
commence in any of the class' series. This delay of open trading
results in a backlog of orders that missed the opening and queue while
awaiting open trading. ROS should alleviate such backlogs, thus
improving market efficiency for all market participants. By
facilitating an expedited opening of options classes on the CBOE, ROS
should remove an impediment to and help perfect the mechanism of a free
and open market consistent with the CBOE's responsibilities under
Section 6 of the Act. Moreover, by integrating features into ROS, such
as the crossing of customer orders, and by permitting the participation
of non market-maker broker-dealer orders in the opening process, the
Commission believes that the proposal should promote fair participation
in ROS by all market participants.
The Commission recognizes that certain aspects of ROS may require
heightened scrutiny by the CBOE to ensure that market-makers are not
permitted to use the flexibility they have to set an opening price to
the disadvantage of investors and other market participants. In
particular, ROS provides market-makers discretion to set certain
thresholds and the AutoQuote value that drives the ROS algorithm. The
Exchange has assured the Commission that it will ensure that market-
makers exercise their discretion in a manner consistent with their
obligation to price options fairly. The Commission expects that the
CBOE will develop objective, quantifiable standards for ensuring that
the market-makers are satisfying those obligations and to surveil for
such compliance. The pilot offers an opportunity for the Commission to
evaluate the Exchange's efforts at surveilling market-maker activities
associated with ROS. Prior to permanent approval, the Commission
expects to review the results of the applied surveillance program.
Although ROS is likely to greatly improve the opening on the CBOE,
the Commission believes that the system can and should be improved to
permit participation by orders that cannot presently be included on
CBOE's Electronic Book. The Commission does not view the manual
handling of non-bookable orders as the optimal solution for ensuring
that those orders are fairly incorporated into the opening. Although
market-makers may now adjust their AutoQuote manually to reflect non-
bookable orders, it would be preferable for such orders to be
electronically incorporated into a ROS opening to fully interact with
customer orders on the Electronic Book.
Moreover, the proposed handling of non-bookable orders may result
in such orders receiving an inferior level of priority than they would
enjoy today. Although ROS and the proposed manual handling procedures
require a sequence of events surrounding the opening that make
traditional, strict time priority rules difficult to apply, the
Exchange has proposed manual handling procedures that should minimize
the proposal's impact on exactly which orders receive fills. For
example, the Exchange clarified the participation rights of broker-
dealer proprietary limit orders equal to the ROS opening price.\23\ The
Commission, however, expects that during the pilot period the Exchange
will ensure that, in practice, non-bookable orders continue to receive
fair treatment substantially comparable to that received today. Prior
to permanent approval, the Commission expects the Exchange to develop a
workable plan for electronic incorporation of non-bookable orders on
ROS. Because such orders represent a small percentage of orders
executed on the Exchange,\24\ however, and because of the great
potential benefits ROS has for the opening, the Commission believes
that in the interim it is prudent to allow ROS to be implemented on a
pilot basis to alleviate problems associated with delays in the
transition to open trading.
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\23\ See Amendment No. 4.
\24\ See Amendment No. 3.
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[[Page 8160]]
The Commission finds good cause for approving proposed Amendment
Nos. 3 and 4 prior to the thirteenth day after the date of publication
of notice of filing of those amendments in the Federal Register. The
amendments clarify the original proposal and the system's proposed
operation, and propose implementing ROS on a pilot basis.\25\ By
implementing ROS on a pilot basis, the Exchange can immediately address
difficulties associated with lengthy opening rotations and study ROS
under market conditions while giving the Commission an opportunity to
view the operation of ROS under market conditions before approving it
permanently.
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\25\ See Amendment Nos. 3 and 4.
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The Commission expects the CBOE to study issues related to the
SEC's concerns during the pilot period and to report back to the
Commission at least sixty days prior to seeking permanent approval of
ROS. Among issues that the Exchange should explore are: how and when
market-makers set ROS risk and size thresholds; how often such
thresholds are exceeded and result in the adjustment of AutoQuote; the
effect of AutoQuote adjustments on the quality of customer executions;
any effects on existing order execution priority; and the handling of
and adjustments made for non-bookable orders.
V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 3 and 4, including whether the
proposed amendments are 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 March 11, 1999.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-CBOE-98-48), as amended, is
approved through March 31, 2000.
\26\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3958 Filed 2-17-99; 8:45 am]
BILLING CODE 8010-01-M