[Federal Register Volume 64, Number 205 (Monday, October 25, 1999)]
[Notices]
[Pages 57502-57504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27716]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42012; File No. SR-CBOE-99-56]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Operation of the Retail Automatic 
Execution System

October 15, 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 October 6, 1999, the Chicago Board Options Exchange Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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.
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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 adopt a new policy concerning the 
administration of its rules governing the operation of its Retail 
Automatic Execution System (``RAES''). The new policy concerns the 
handling of orders on RAES in cases where the CBOE's best bid or offer 
is inferior to the best bid or offer in another market. The policy will 
be reflected in new Interpretation .08 to rule 6.8. 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.

[[Page 57503]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Interpretation .02 to CBOE Rule 6.8 governs the handling of orders 
for multiply-traded options on RAES in cases where the CBOE's best bid 
or offer is inferior to the current best bid or offer in any other 
market. When RAES receives an order for a multiply-traded option at a 
time when a better bid or offer for that option (the National Best Bid 
or Offer, or ``NBBO'') is displayed on another exchange, the order will 
either be rejected for manual handling (so that the order is not 
automatically executed at an inferior price to the NBBO), or the order 
will be executed at the NBBO if the NBBO is better than the CBOE bid or 
offer by no more than the designated number of minimum trading 
variations (``step-up amount''). Pursuant to Interpretation .02 to rule 
6.8, the appropriate Floor Procedure Committee (``FPC'') determines 
which option classes will be entitled to be executed automatically at 
the better bid or offer and also determines the step-up amount at which 
the order still will be executed automatically on RAES.\3\ In 
situations where the NBBO is better than the CBOE bid or offer by more 
than the number of ticks represented by the designated step-up amount, 
the order will be rerouted for manual handling.
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    \3\ In this regard, the Commission recently approved an 
amendment to Interpretation .02 that authorizes the appropriate FPC 
to establish a step-up amount greater than the one-tick increment 
established pursuant to CBOE rule 6.42. See Securities Exchange Act 
Release No. 41821 (September 1, 1999), 64 FR 50313 (September 16, 
1999) (SR-CBOE-99-17).
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    The application of a step-up amount (pursuant to Interpretation .02 
to rule 6.8), particularly a step-up amount two ``ticks'' or more, 
could result in a crossed market on the Exchange (i.e., a market where 
a stepped-up bid would be higher than the best offer, or a stepped-down 
offer would be lower than the best bid). The Exchange believes that it 
is inconsistent with a fair and orderly market for an automatic step-up 
to result in a crossed market. Moreover, by forcing market makers to 
buy options contracts at higher prices than they can sell those 
contracts, a crossed market subjects market makers to potentially 
significant losses.\4\ The proposed new policy will prevent these 
occurrences as further described below.
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    \4\ Telephone conversation between Timothy Thompson, Director, 
Regulatory Affairs, CBOE and Gordon Fuller, Special Counsel, 
Division of Market Regulation, SEC (October 6, 1999).
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    Under proposed new Interpretation .08 to Rule 6.8, orders will not 
be automatically executed on RAES at stepped-up prices in situations 
where, after applying the step-up amount, there would be a crossed 
market on the Exchange. Any orders prevented from being automatically 
executed by operation of this policy will be rerouted to the Public 
Automated Routing (``PAR'') machine of the Designated Primary Market 
Maker (``DPM'') for manual handling.\5\ Upon receipt of that order, in 
accordance with CBOE Rule 6.73, the floor broker or DPM will be 
obligated to use due diligence in the handling of the order to execute 
the order at the best price or prices available to him.
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    \5\ The PAR screen is a dynamic touch-screen terminal designed 
to allow electronic representation of crowd-routed orders. The PAR 
screen enables a broker to trade, cancel, print or electronically 
book an order or bundle of orders. When the order is filled or 
canceled, the execution or cancel report is sent from the trading 
pit to the branch. Telephone conversation between Timothy Thompson, 
Director, Regulatory Affairs, CBOE and Gordon Fuller, Special 
Counsel, Division of Market Regulation, SEC (October 12, 1999).
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    In addition, pursuant to the Exchange's firm quote rule, Rule 8.51, 
any order that is rerouted will be entitled to be executed at the 
Exchange's displayed bid or offer when that order is represented in 
trading crowd. Of course, depending on the circumstances, that order 
may be filed at a price better than the DBOE's displayed bid or offer.
    By preventing the automatic execution of orders at prices that 
reflect crossed markets on the Exchange, the Exchange represents that 
the proposed policy is consistent with and in furtherance of the 
objectives of Section 6(b)(5) of the Act to promote just and equitable 
principles of trade and to remove impediments to the perfect the 
mechanism of a free and open market.

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, Participant 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

    The foregoing rule change has become immediately effective pursuant 
to Section 19(b)(3)(A) and Rule 19b-4(f)(6) under the Act because:

    (i) It does not significantly affect the protection of investors 
or the public interest;
    (ii) It does not impose any significant burden on competition; 
and
    (iii) By its terms, it does not become operative for 30 days 
after the date of the filing, or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest; provided that the self-regulatory organization has 
given the Commission written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the date 
of filing of the proposed rule change, or such shorter time as 
designated by the Commission.

In this regard the CBOE has agreed that the proposal need not become 
operative for 30 days, but has requested that the operative date be 
accelerated. In addition, the CBOE provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, more than five 
business days prior to the date of filing of the proposed rule change.
    The Commission finds that it is appropriate to designate the 
proposal to become operative today because such designation is 
consistent with the protection of investors and the public interest. 
Specifically, the Commission finds that it is appropriate to accelerate 
the operative date of the proposed rule change because the proposal 
will allow the CBOE to provide the benefits of a larger ``step-up 
amount'' for a greater number of customers, promoting prompt executions 
of these customer order at the NBBO. In addition, the proposal is 
similar to a rule of the Pacific Exchange, Inc. (``PCX'') that was 
approved by the Commission in September 1998.\6\ For these reasons the 
Commission finds that designation of the proposal to become operative 
today is consistent with the protection of investors and the public 
interest.\7\
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    \6\ Securities Exchange Act Release No. 40412 (September 8, 
1998), 63 FR 49626 (September 16, 1998) (SR-PCX-98-27).
    \7\ In reviewing this proposal, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation consistent with Section 3(f) of the Act, 15 U.S.C. 78c(f).
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    The Commission requests, however, that the CBOE provide it with 
information regarding the occasions in which the new Interpretation is 
applied and the promptness of the manual execution of orders that are 
prevented from automatic execution by operation of the new 
Interpretation. This data should cover, at a minimum, the period 
commencing as of the proposed Interpretation's operative date and 
concluding six months thereafter.

[[Page 57504]]

    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

VI. Solicitation of Commission

    Interested persons are invited to submit 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 
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-99-56 and should 
be submitted by November 15, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27716 Filed 10-22-99; 8:45 am]
BILLING CODE 8010-01-M