[Federal Register Volume 64, Number 140 (Thursday, July 22, 1999)]
[Notices]
[Pages 39546-39547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18658]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41621; File No. SR-CBOE-99-29]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Allow RAES Orders 
To Trade Against Orders in the Exchange's Limit Order Book

July 14, 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 June 23, 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 Exchange. 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.
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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 rule governing the operation of its 
Retail Automatic Execution System (``RAES'') to provide for orders 
entered on RAES to trade against orders in the Exchange's customer 
limit order book. The text of the proposed rule change is available at 
the Office of the Secretary, the CBOE, and at he 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 Section 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 Exchange is developing a system, the Automated Book Priority 
system, that will allow an order entered into RAES to trade directly 
with an order on the Exchange's customer limit order book in those 
cases where the prevailing market bid or offer is equal to the best bid 
or offer on the Exchange's book.\3\ Currently, when a RAES order is 
entered into the Exchange's Order Routing System at a time when the 
prevailing market bid or offer is equal to the best bid or offer on the 
Exchange's book, the order is routed electronically to a Floor Broker's 
terminal or work station in the crowd subject to the

[[Page 39547]]

volume parameters of each firm. In the event that the firm routing the 
order is not routing orders to the crowd, the order would be routed to 
the firm's own booth.\4\ The orders are routed to the Floor Brokers 
instead of being automatically executed at the market price, because 
CBOE Rule 6.45 provides that bids or offers displayed on the customer 
limit order book are entitled to priority over other bids or offers at 
the same price. Until the Automated Book Priority system was developed, 
the Exchange did not have a method to maintain the priority of orders 
on the customer limit order book other than to reject the order from 
RAES in those circumstances.
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    \3\ In the event that the order in the book is for a smaller 
number of contracts than the RAES order, the balance of the RAES 
order will be assigned to participating market-makers at the same 
price at which the rest of the order was executed.
    \4\ Currently, RAES orders in options on IBM, the Dow Jones 
Industrial Average (DJX) and the Standard & Poor's 100 Stock Index 
(OEX) may be executed on RAES even where the prevailing market bid 
or offer equals the best bid or offer on the Exchange's book. Upon 
the implementation of the Automated Book Priority system, RAES 
orders in these option classes, like all other option classes, will 
trade against orders in the book in these circumstances.
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    To implement the Automated Book Priority system, the CBOE proposes 
to amend paragraphs (b) and (c) of CBOE Rule 6.8, ``RAES Operations in 
Equity Options,'' to provide for RAES orders to trade directly against 
orders entered in the Exchange's customer limit order book. The 
Exchange also proposes to delete Interpretation .04 of CBOE Rule 6.8 
which concerns how orders that have been ``kicked out'' pursuant to 
paragraph (c) should be handled. Of course, once a RAES order is 
``kicked out'' or rerouted to a Floor Broker, that order becomes 
subject to market risk as there may be some delay between the time the 
order is rerouted and the time the order is actually filled by the 
Floor Broker in open outcry. In times of extreme market volatility, 
even a short period of time between the rerouting and the execution of 
the order could have a significant effect on the price at which the 
order is executed.
    The Automated Book Priority system will both prevent the RAES order 
from becoming subject to market risk and preserve the priority of the 
booked order. Thus, the proposed rule change will benefit customers 
using the RAES system as well as those whose orders are in the 
Exchange's book because both categories of orders will be executed more 
quickly than they would have been executed otherwise.
    Because the Exchange does not believe the Automated Book Priority 
system will be ready to be implemented until at least August 1999, the 
Exchange does not plan to actually implement this rule change until the 
system is ready to be implemented. The Exchange will provide its 
membership with prior notice by means of a Regulatory Circular 
informing them of the date the system will be implemented and the rule 
will be changed.
2. Statutory Basis
    The CBOE believes the proposed rule change is consistent with and 
furthers the objectives of Section 6(b)(5) \5\ of the Act in that it is 
designed to remove impediments to a free and open market and to protect 
investors and the public interest.
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    \5\ 15 U.S.C. 78f(b)(5).
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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 the 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 
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-99-29 and should be 
submitted by August 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18658 Filed 7-21-99; 8:45 am]
BILLING CODE 8010-01-M