[Federal Register Volume 64, Number 134 (Wednesday, July 14, 1999)]
[Notices]
[Pages 38058-38059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17884]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41599; File No. SR-CBOE-99-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Exchange's Rapid Opening System

July 6, 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 May 21, 1999, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The CBOE proposes to amend Rule 6.2A, Rapid Opening System, which 
governs the operation of the Exchange's Rapid Opening System, to allow 
for two Floor Officials to adjust effected trades in cases where an 
underlying stock has been opened at an erroneous price and later 
corrected on the underlying market. 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

    The Exchange proposes to add sub-paragraph (a)(iii) to CBOE Rule 
6.2A to provide that two Floor Officials may adjust trades executed 
through the Exchange's Rapid Opening System (``ROS'') when the primary 
market for the underlying has opened a security at an erroneous price 
and then later corrects that opening price.
    In the period of time since CBOE Rule 6.2A was approved by the 
Commission on a pilot basis,\3\ the Exchange has had a very positive 
experience with ROS. ROS has enabled the Exchange to open classes of 
options within seconds of the opening of the underlying security thus,

[[Page 38059]]

enabling firms and customers to enter orders in open trading almost 
immediately after the opening bell. In those classes where it has been 
employed, ROS additionally has prevented backlogs of orders from 
developing during the opening. During the time ROS has been employed on 
the floor, there have been a very few instances. however, where ROS has 
opened the option class at a price based upon an erroneous opening 
price of the underlying security disseminated by the primary market 
which is later corrected by the primary market only after ROS had 
opened the option class.\4\
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 41033 (February 9, 1999) 
64 FR 8156 (February 18, 1999).
    \4\ Because ROS employs the Exchange's AutoQuote system and the 
Exchange's AutoQuote system relies on feed of the underlying to 
determine the option's price, an inaccurate underlying price can 
lead to an inaccurate ROS opening price.
---------------------------------------------------------------------------

    In those instances where ROS has opened on an erroneous print, 
staff of the Exchange has had to expend a substantial amount of time 
working with the participants in the trades to get their agreement to 
adjust the trades and to determine which customer orders should have 
been filled on the opening. The staff has had to work to get the 
parties to the trade to agree before the trades have been adjusted. The 
market-makers in the particular class where ROS is employed have 
suffered significant deleterious financial consequences from these 
openings on an erroneous print because, under the current 
circumstances, only those market-maker trades the occurred at a price 
that disfavored a customer will be adjusted while the market-makers 
will retain those trades done at a price that favored a customer. As a 
result, the Exchange believes market-makers may become discouraged from 
participating in ROS because, even though the expected incidences where 
an erroneous print occur are rare, the financial consequences to a 
particular market-maker can be substantial.
    It should also be noted that when ROS is opened based upon an 
incorrect price of the underlying there are customer orders that are 
not being filled that might otherwise have been filled had ROS opened 
at the correct price. Also, there are customer to customer trades that 
will be executed at a price based upon an incorrect underlying price. 
Floor Officials would have the authority to assign trades for these 
customers to market-makers in the crowd as well and to adjust the 
execution price of the customer to customer trades. Floor Officials 
would use their judgment to adjust trades as necessary to maintain a 
fair and orderly market.
    After these problems first occurred, Exchange staff has educated 
trading crowds about methods that they may employ to help prevent these 
problems from occurring in the future. For example, the trading crowds 
may wait to send their AutoQuote values until after the initial bid/ask 
quotes on the underlying are disseminated to ensure that the initial 
disseminated opening price for the underlying security is in line with 
the bid/ask quotes. Also, a system enhancement has been put in place 
that will provide an indication to crowds when ROS is being opened at a 
price that appears erroneous. There is no guarantee that these methods 
can prevent every occurrence where a class is opened on ROS at an 
erroneous price. The Exchange believes therefore, it is necessary to 
grant Floor Officials the authority to adjust opening trades in the 
event that the class is opened at an erroneous price. This authority is 
similar to the authority Floor Officials currently have with respect to 
RAES trades.\5\ The Exchange believes this change will prevent market-
makers from becoming discouraged from participating on ROS and will 
save time spent by Exchange staff negotiating with participants on 
trades that occur on erroneous prints. At the same time the rule change 
will give Floor Officials the authority to determine which trades 
should be adjusted so that a fair and equitable result is achieved for 
all market participants, including those customers that might not have 
been filled on the opening but who might have been had the class been 
opened at the correct price.
---------------------------------------------------------------------------

    \5\ CBOE Rule 6.8(a)(ii) states in part: ``A trade executed on 
RAES at an erroneous quote should be treated as a trade reported at 
an erroneous price and adjusted to reflect the accurate market after 
receiving a Floor Official's approval.''
---------------------------------------------------------------------------

    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of Act in that it is designed to remove 
impediments to a free and open market and protecting 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-
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-99-20 and should 
be submitted by August 4, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-17884 Filed 7-13-99; 8:45 am]
BILLING CODE 8010-01-M