[Federal Register Volume 64, Number 202 (Wednesday, October 20, 1999)]
[Notices]
[Pages 56547-56548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27371]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41995; File No. SR-CBOE-99-29]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendments No. 1 and No. 2 to 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

October 8, 1999.

I. Introduction

    On June 23, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ 
thereunder, a proposed rule change. In its proposal, the CBOE seeks to 
amend its rules to allow Retail Automatic Execution System (``RAES'') 
orders to trade directly against orders in the Exchange's limit order 
book. The proposed rule change was published for comment in the Federal 
Register on July 22, 1999.\3\ On August 11, 1999, the CBOE filed 
Amendment No. 1 to the proposed rule change.\4\ On September 23, 1999, 
the CBOE filed Amendment No. 2 to the proposed rule change.\5\ The 
Commission received one comment on the proposal.\6\ This order approves 
the proposal, as amended. In addition, the Commission is publishing 
this notice to solicit comments on Amendments No. 1 and No. 2 to the 
proposed rule change and is simultaneously approving Amendments No. 1 
and No. 2 on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 41621 (July 14, 
1999), 64 FR 39546.
    \4\ In Amendment No. 1, the CBOE makes technical, non-
substantive changes to the proposal. The CBOE resubmitted the text 
of the Exchange Rules to show the actual text of these rules as of 
the date the proposed rule change was submitted. See letter from 
Timothy Thompson, Director, Regulatory Affairs, CBOE, to Michael 
Walinskas, Associate Director, Division of Market Regulation 
(``Division''), Commission, dated August 10, 1999 (``Amendment No. 
1'').
    \5\ In Amendment No. 2, the CBOE makes additional technical, 
non-substantive changes to the proposal. The CBOE resubmitted the 
proposed rule text to reflect amendments to existing rule text from 
a separate filing (SR-CBOE-99-17) that was approved by the 
Commission on August 23, 1999. See Securities Exchange Act Release 
No. 41782, 64 FR 47881 (Sept. 1, 1999). In addition, the CBOE 
clarifies that portions of rule text approved by SR-CBOE-99-17 will 
be removed by this proposed rule change. See letter from Timothy 
Thompson, Director, Regulatory Affairs, CBOE, to Ken Rosen, 
Attorney, Division, Commission, dated September 22, 1999 
(``Amendment No. 2'').
    \6\ In approving the proposal, the Commission has considered the 
commenter's support of the proposed rule change. See letter from 
Gerald D. Putnam, Chief Executive Officer, Archipelago, L.L.C., to 
Jonathan G. Katz, Secretary, Commission, dated August 13, 1999.
---------------------------------------------------------------------------

II. Description of the Proposal

    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.\7\ Currently, when a RAES order is

[[Page 56548]]

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 (i.e., ``kicked 
out'') to a Floor Broker's terminal or work station in the crowd 
subject to the volume parameters of each firm. This allows for manual 
representation of the order in the crowd and generally prevents orders 
from trading through the book.\8\ The orders are kicked out 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.
---------------------------------------------------------------------------

    \7\ 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.
    \8\ 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.
---------------------------------------------------------------------------

    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 the 
current paragraph (c) should be handled.
    The CBOE believes that 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.
    The Exchange anticipates that the Automated Book Priority system 
will be ready to be implemented by October 31, 1999.\9\ The Exchange 
will provide its membership with prior notice by means of a Regulatory 
Circular informing them of the date the system and the rule change will 
be implemented.
---------------------------------------------------------------------------

    \9\ Telephone call between Timothy Thompson, Director, 
Regulatory Affairs, CBOE, and Joseph P. Corcoran, Attorney, 
Division, Commission, on August 25, 1999.
---------------------------------------------------------------------------

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act.\10\ In 
particular, the Commission finds the proposal is consistent with 
Section 6(b)(5) \11\ of the Act. Section 6(b)(5) requires, among other 
things, that the rules of an exchange be designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \10\ In addition, pursuant to Section 3(f) of the Act, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change will benefit 
investors by allowing RAES orders to trade against orders in the 
Exchange's limit order book. Currently, when a RAES order is entered at 
a time when the prevailing market bid or offer is equal to the best bid 
or offer of the Exchange's limit order book, the order is kicked out 
into the crowd for manual execution. Although this generally prevents 
RAES orders from trading through the book, when a RAES order is kicked 
out to the crowd, it may become subject to market risk, which can be 
significant in a fast moving market. Moreover, the kick out feature is 
not employed for IBM, DJX, and OEX options, where RAES orders can trade 
through the book. The Commission finds that the implementation of this 
new system will provide for more efficient execution of both RAES and 
booked orders. Investors should benefit from more efficient executions, 
while the priority of booked orders is maintained.
    Linking the Exchange's limit order book to the RAES system is 
important to ensure proper quality of execution of RAES orders and 
booked limit orders. Implementation is particularly important for limit 
orders on IBM, DJX, and OEX options, where booked orders may receive 
delayed or no execution. The Commission expects that the Exchange will 
take all reasonable steps necessary to implement the proposal by 
October 31, 1999.
    The Commission finds good cause for approving Amendments No. 1 and 
No. 2 prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. In Amendment No. 1, the CBOE 
merely clarified the text of the Exchange Rules to show the actual text 
of these rules as of the date the proposed rule change was submitted. 
In Amendment No. 2, the CBOE resubmitted the text of the Exchange Rules 
to show the text of these rules as amended by filing (SR-CBOE-99-17) 
that was approved by the Commission on August 23, 1999.\12\ In 
addition, the CBOE explains that portions of the rule text approved by 
SR-CBOE-99-17 will be removed by this proposed rule change. Therefore, 
the amendments did not substantively alter the proposal.
---------------------------------------------------------------------------

    \12\ See supra note 5.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-99-29), as amended, is 
approved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27371 Filed 10-19-99; 8:45 am]
BILLING CODE 8010-01-M