[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] ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \4\ Telephone conversation between Timothy Thompson, Director, Regulatory Affairs, CBOE and Gordon Fuller, Special Counsel, Division of Market Regulation, SEC (October 6, 1999). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \8\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 99-27716 Filed 10-22-99; 8:45 am] BILLING CODE 8010-01-M