[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]
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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.
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\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.
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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.
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\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.
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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 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.
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\9\ Telephone call between Timothy Thompson, Director,
Regulatory Affairs, CBOE, and Joseph P. Corcoran, Attorney,
Division, Commission, on August 25, 1999.
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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.
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\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).
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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.
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\12\ See supra note 5.
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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.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27371 Filed 10-19-99; 8:45 am]
BILLING CODE 8010-01-M