[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32568-32570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15352]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41501; File No. SR-CBOE-99-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Governing the 
Operation of the Retail Automatic Execution System

June 9, 1999
    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 April 16, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOE. 
On

[[Page 32569]]

May 21, 1999, the CBOE submitted to the Commission Amendment No. 1 to 
the proposed rule change.\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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the CBOE clarified issues relating to 
the implementation of new order assignment procedures for orders 
entered into the CBOE's Retail Automatic Execution System. See 
letter from Timothy Thompson, Director, Regulatory Affairs, CBOE, to 
Gordon Fuller, Special Counsel, Division of Market Regulation, SEC, 
dated May 20, 1999 (``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 to amend its rules governing the operation of its 
Retail Automatic Execution System (``RAES'') to increase the maximum 
order sizes on certain options and clarify the authority of the 
appropriate Floor Procedure Committees (``FPCs'') of the Exchange to 
change current procedures governing assignment and price improvement of 
RAES orders, as described below. 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, 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

    The principal purpose of the proposed rule change is to increase 
from 20 to 50 contracts the maximum size or orders for equity options 
and certain classes of index options that are eligible to be executed 
through RAES. In addition, the proposed rule change clarifies the 
authority of the appropriate FPCs to change RAES order assignment 
procedures, and reflects the decision of the appropriate FPCs to 
implement a new assignment procedure called ``Variable RAES.'' The 
proposed rule change also eliminates the current ``one-tick'' limit 
applicable to the RAES automatic ``step-up'' procedure, which provides 
for the automatic improvement of the price at which an order is 
executed on RAES in order to match a better price in another market. 
The proposal would allow the appropriate FPCs to authorize automatic 
RAES step-ups for price differentials greater than the one ``tick'' 
differential currently specified in the rules. Finally, the proposed 
rule change makes a number of editorial revisions to clarify or update 
the language of current rules governing RAES operations.
    Currently, the maximum size of RAES-eligible orders is 20 contracts 
for all classes of options traded on CBOE for which a greater maximum 
is not expressly provided in the rules. Options subject to the 20 
contract maximum include all classes of equity options, all classes of 
sector index options and all other classes of index options except 
options on the S&P 500 Index, the Nasdaq 100 Index, the Dow Jones 
Industrial Average, and interest rate options.\4\ Increasing the RAES 
eligibility maximum to 50 contracts for these classes of options will 
not automatically permit orders up to this size to be entered into 
RAES. Instead, the actual maximum RAES eligibility size will be 
established by the appropriate FPC of the Exchange, which may maintain 
the maximum for particular classes at levels below the 50-contract 
maximum allowable under the proposed rule change.
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    \4\ The RAES eligibility maximum is currently 99 contracts for 
options on the S&P 500 Index and the Nasdaq 100 Index, and 100 
contracts for options on the DJIA and interest rate options. To 
simplify the administration of RAES and eliminate confusion, the 
proposed rule change would make the RAES eligibility maximums 100 
contracts for these four classes of options. See Rule 6.8(e). One 
hundred contracts is also the proposed RAES eligibility maximum for 
options on the Dow Jones High Yield Select 10 Index, described in 
File No. SR-CBOE-99-06, which is pending with the Commission. 
Securities Exchange Act Release No. 41357 (April 30, 1999), 64 FR 
25091 (May 10, 1999).
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    Under existing Interpretation and Policy .01 under Rule 6.8, the 
appropriate FPC may increase the size of RAES-eligible orders for 
multiply-traded equity options to match the size of orders in options 
of the same class that are eligible for entry into the automated 
execution system of any other options exchange, subject to filing 
notice of the increase under Section 19(b)(3)(A) of the Act.\5\ The 
Exchange nonetheless believes the FPC should be able to permit up to 50 
contracts to be eligible for RAES in response to the perceived needs of 
the market, as reflected in member requests, without regard to 
automatic execution limits on other exchanges. The proposal will also 
provide greater flexibility to the Exchange in its competition for 
order flow with other exchanges that already have 50-contract maximum 
eligibility levels for their own automatic execution systems, since the 
Exchange will no longer be limited to acting in response to increases 
in automatic execution eligibility levels initiated by the other 
exchanges. CBOE represents that its systems capacity is sufficient to 
accommodate the increased number of automatic executions anticipated to 
result from implementation of this proposal.
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    \5\ 15 U.S.C. 78s(b)(3)(A).
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    In addition, the proposed rule change clarifies the authority of 
the appropriate FPCs to change RAES order assignment procedures, and 
reflects the decision of the appropriate FPCs to implement a new 
assignment procedure called ``Variable RAES.'' Under current 
procedures, RAES orders are randomly assigned to market makers, and 
each market maker is required to buy or sell the entire order assigned 
to him or her. By contrast, under Variable RAES, each market maker will 
be able to designate in advance, at the time of logging on to RAES, a 
maximum number of contracts he or she is willing to buy or sell each 
time a RAES order is randomly assigned to that market maker.\6\ No 
market maker, however, will be able to designate a maximum that is less 
than a stated minimum number of contracts per assignment established by 
the appropriate FPC. In determining appropriate minimum execution 
levels,the FPC must take into account whether market makers have 
sufficient capital to fill an order of that size.
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    \6\ Variable RAES is proposed partly in anticipation of the 
likelihood that as the maximum size of RAES-eligible orders is 
increased, individual market makers may seek to limit the size of 
the RAES orders they are obligated to fill.
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    If the number of contracts in a RAES order is less than or equal to 
the market maker's specified limit, the market maker will be obligated 
to buy or sell all of the contracts in the order, and the next RAES 
order will be assigned to the next market maker on the RAES assignment 
rotation. If the number of contracts in an order exceeds the specified 
limit, the market maker will be obligated to buy or sell the number of 
contracts equal to the specified limit. The remainder of the order will 
be assigned to the next market maker on the RAES assignment rotation, 
who will likewise be obligated to buy or sell the number of remaining 
unassigned contracts in the order up to that market maker's specified 
limit. The assignment rotation will continue in this manner until all 
of the contracts in the order have been assigned to one or more market 
makers, even if this requires

[[Page 32570]]

more than one assignment to the same market maker as the assignment 
rotation continues.
    Variable RAES will apply to all classes of options eligible for 
entry into RAES. CBOE represents that the Variable RAES procedure will 
be implemented following the effectiveness of this proposed rule 
change, and will be described in a circular to be distributed to the 
membership prior to that time. To allow for a period of adjustment, 
CBOE states that the Variable RAES procedure may be implemented across 
option classes in phases. Finally, if the appropriate FPC decides to 
implement a different RAES order assignment procedure, it must file a 
proposed rule change with the Commission pursuant to Section 19(b) of 
the Act and Rule 19b-4 thereunder.
    In addition, the proposed rule change authorizes the appropriate 
FPC to establish a ``step up amount'' for purposes of the automatic 
step-up procedure of Interpretation and Policy .02 under Rule 6.8 that 
is greater than the current amount, which equals the minimum quote 
interval (``tick'') for that class of option under Rule 6.42. The 
automatic step-up procedure currently states that in designated classes 
of multiply-traded options, if the Exchange's best bid or offer is 
inferior to the bid or offer in another market by no more than one 
tick, an order in RAES will be automatically executed at the better bid 
or offer. The proposed rule change will enable the appropriate FPC to 
establish price differentials greater than one tick at which orders 
will be automatically executed in RAES in order to match better bids or 
offers in other markets.
    By enhancing the Exchange's ability to provide instantaneous, 
automatic execution of public customers' orders at the best available 
prices, the Exchange believes that the proposed rule change is 
consistent with the provisions of Section 6(b) \7\ of the Act in 
general, and furthers the objectives of Section 6(b)(5) \8\ of the Act 
in particular, in that it will promote just and equitable principles of 
trade, remove impediments to and perfect the mechanisms of a free and 
open market, and protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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.

VI. 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 20549-0609. 
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-99-17 and should 
be submitted by July 8, 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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15352 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M