[Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
[Notices]
[Pages 47881-47882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22696]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41782; File No. SR-CBOE-99-17]


Self-Regulatory Organizations; Notice of Filing of Amendment #2 
and Order Granting Partial Accelerated Approval to a Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to the 
Operation of the Retail Automatic Execution System

August 23, 1999.

I. Introduction

    On April 16, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') 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 amending the CBOE's rules 
governing the operation of its Retail Automatic Execution System 
(``RAES''). On May 21, 1999, the CBOE filed with the Commission 
Amendment No. 1 to the proposal.\3\ Today, the CBOE filed Amendment No. 
2 to the proposal.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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'').
    \4\ See letter from Christopher R. Hill, Attorney, CBOE, to 
Michael Walinskas, Associate Director, Division of Market 
Regulation, SEC, dated August 23, 1999 (``Hill Letter'').
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a. The Initial Proposal

    The proposal as amended by Amendment No. 1 (``Initial Proposal'') 
seeks to increase the maximum order size of certain RAES-eligible 
options from 20 to 50 contracts. It also contains provisions relating 
to the authority of the CBOE Floor Procedure Committees (``FPCs'') to 
change RAES order assignment procedures (including the authority to 
implement a procedure called ``Variable RAES,'' described below) and 
improve the execution price of RAES orders in multiple listed options 
to match a better price on another market. Notice of the Initial 
Proposal was published in the Federal Register on June 17, 1999.\5\ The 
Commission received no comments on the proposal. The proposal is 
pending with the Commission.
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    \5\ See Securities Exchange Act Release No. 41501 (June 9, 
1999), 64 FR 32568.
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b. The Current Amendment

    Amendment No. 2 (``Current Amendment'' or ``Proposed Rule Change'') 
will permit the CBOE to immediately implement a new order assignment 
procedure called ``Variable RAES'' for CBOE options transactions in 
five stocks that are dually listed on both the Philadelphia Stock 
Exchange (``Phlx'') and the CBOE. Those stocks are Dell Computer 
Corporation (``DLQ''), International Business Machines (``IBM''), 
Johnson & Johnson (``NJN''), Coca-Cola (``KO''), and Ford Motor Company 
(``F''). The Current Amendment was filed in tandem with a related rule 
proposal, SR-CBOE-99-47, which increases the maximum RAES order size 
from 20 to 50 contracts in options on those five stocks only. SR-CBOE-
99-47 becomes effective today. The CBOE seeks immediate Commission 
approval of the Current Amendment so that Variable RAES can be used 
today, when the new order size maximum on the five dually traded 
options goes into effect.

II. Description of the Proposal

    Under former procedures, RAES orders were randomly assigned to 
market makers, and each market maker had to buy or sell the entire 
order assigned to him or her. By contrast, Variable RAES as implemented 
in the Current Amendment will enable market maker to designate a 
maximum number of contracts he or she is willing to buy or sell when a 
RAES order for any of the five dually listed options is assigned to 
that market maker.\6\ The CBOE represents that, ``[w]ith a higher size 
limit for RAES orders, this flexibility to choose their own maximum 
participation in any one RAES trade will encourage more market makers 
to participate in RAES, since it will give them greater control over 
the risks they take by participating in RAES.'' \7\
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    \6\ The maximum order size selected by the market maker must be 
equal to or greater than a minimum order size set by the FPC. The 
FPC will initially set the minimum at 20 contracts per order for 
each of the five options covered by the Current Amendment, and may 
adjust that level up or down in the future for any of these options. 
If the FPC decides to increase the 20-contract minimum in the 
future, it will take into account the ability of market makers to 
accept the heightened risk associated with that increase. Telephone 
conversation between Tim Thompson, Director, Regulatory Affairs, 
CBOE, and Christopher R. Hill, Attorney, CBOE, and Gordon Fuller, 
Special Counsel, Division of Market Regulation, SEC (August 23, 
1999).
    \7\ See Hill Letter, supra note 4, at 1.
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III. Discussion

    We believe that accelerated approval of Variable RAES for the five 
dually listed options is appropriate for three reasons. First, it 
allows RAES market makers to choose the level of risk they are 
comfortable with. This is important because the CBOE today is 
increasing the maximum size of orders eligible for RAES from 20 to 50 
contracts in those five dually listed options, thus increasing the 
potential exposure of RAES market makers to risk in those options. 
Second, the proposal does not otherwise change the way RAES operates 
from a customer perspective. Third, the Commission previously published 
for comment the Initial Proposal, which included a much more expansive 
provision permitting implementation of Variable RAES for all options 
classes, not just the five classes at issue here. We received no 
comments on the Initial Proposal, and we believe the Current Amendment 
does not raise any new issues.
    We are not now approving the textual changes to the RAES rules 
proposed by the CBOE in its Initial Proposal. Rather, we are continuing 
to work with the CBOE to address outstanding issues raised by those 
rules relating to the

[[Page 47882]]

manner in which CBOE will be able to employ Variable RAES. Such issues 
relate to the degree of authority delegated to the appropriate FPCs 
regarding Variable RAES, and to internal governance matters. At a later 
time, when we have resolved these outstanding issues, we will also 
consider the specific changes to the text of the rules proposed by the 
CBOE in its Initial Proposal.
    Accordingly, after careful review, the Commission finds that the 
Current Amendment is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission finds that the 
Current Amendment is consistent with Section 6(b)(5), in that it is 
designed ``to promote just and equitable principles of trade * * * to 
remove impediments to and perfect the mechanism of a free and open 
market * * * and, in general, to protect investors and the public 
interest.'' \8\ Moreover, the Commission finds good cause for approving 
the Current Amendment prior to the 30th day after the date the 
Amendment is published for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\9\ Specifically, the Commission finds that 
Variable RAES will appropriately permit RAES market makers to limit 
their risk to compensate for increased exposure to the larger RAES 
order sizes that go into effect today.
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    \8\ 15 U.S.C. 78s(b)(5).
    \9\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the Current Amendment, including whether the 
Current Amendment 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 September 22, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the Current Amendment to SR-CBOE-99-17, be and hereby is 
approved on an accelerated basis.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ In approving the Current Amendment, the Commission has 
considered its impact on efficiency, competition, and capital 
formation, 15 U.S.C. 78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 99-22696 Filed 8-31-99; 8:45 am]
BILLING CODE 8010-01-M