[Federal Register Volume 64, Number 229 (Tuesday, November 30, 1999)]
[Notices]
[Pages 66954-66956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31028]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42167; File No. SR-CBOE-99-57]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
Chicago Board Options Exchange, Inc. Governing the Operation of Its 
Retail Automatic Execution System

November 22, 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 14, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CBOE. 
Additionally, on November 15, 1999, the Exchange filed with the 
Commission Amendment No. 1 to the proposal.\3\ 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.
    \3\ See Letter from Timothy Thompson, Director of Regulatory 
Affairs, CBOE, to Gordon Fuller, Special Counsel, Division of Market 
Regulation, SEC, dated November 15, 1999. The Amendment clarifies 
the wording of the proposed rule change. Because of the substantive 
nature of the amendment, the Commission deems the filing date of the 
proposed rule change to be November 15, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend its rules governing the operation of its 
Retail Automatic Execution System (``RAES''). 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.

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

1. Purpose
    The purpose of the proposed rule change is to permit the 
appropriate Floor Procedure Committee (``FPC'') to designate that RAES 
orders for a particular option series will default for manual 
representation in the trading crowd in situations where the National 
Best Bid or Offer (``NBBO'') for that particular series of that class 
is crossed (e.g., 6\1/8\ bid, 6 asked) or locked (e.g., 6 bid, 6 
asked). The proposed rule will provide market-makers participating on 
RAES protection from having to fill orders at crossed or locked prices 
since the NBBO can become crossed or locked as a result of one market 
disseminating inaccurate or delayed quotes.
    Currently, under CBOE Rule 6.8(a)(ii), when RAES receives an order, 
the system automatically will attach to the order its execution price, 
determined by the prevailing market quote at the time of the order's 
entry into the system, except as otherwise provided in Interpretation 
.02 of CBOE Rule 6.8 in respect of multiply-traded options. A buy order 
will pay the offer; a sell order will sell at the bid.
    Pursuant to Interpretation .02, when RAES receives an order for a 
multiply-traded option at a time when a better bid or offer for that 
option 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 
(``ticks''). The appropriate FPC determines which option classes will 
be entitled to be executed automatically at the better bid or offer and 
also determines the number of ticks better than the CBOE bid or offer 
that the NBBO may be and at which the order still will be executed 
automatically on RAES.\4\ In situations where the NBBO for a particular 
series is more than the designated number of ticks better than the CBOE 
bid or offer, the order for that multiply-traded class will be rerouted 
for manual handling.\5\

[[Page 66955]]

In addition, pursuant to the Exchange's firm quote rule, CBOE 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 the 
trading crowd. Depending on the circumstances, that order may be filled 
at a price better than the CBOE's displayed bid or offer.
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    \4\ See Securities Exchange Act Release No. 41821 (September 1, 
1999), 64 FR 50313 (September 16, 1999), approving SR-CBOE-99-17. 
SR-CBOE-99-17 amends Interpretation .02 to authorize the appropriate 
FPC to establish a step-up amount greater than the one-tick 
increment established under CBOE Rule 6.42.
    \5\ 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. 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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    The proposal adds another situation in which an order for a 
multiply-traded class may be rerouted for manual handling. The 
authority for determining when these orders will be rejected for manual 
handling will be set forth in Interpretation .06 to CBOE Rule 6.8. The 
Exchange is proposing to allow the appropriate FPC to designate option 
classes that will be rerouted for manual handling in situations in 
which the NBBO for a particular series of that class is crossed or 
locked. Depending on the circumstances, the appropriate FPC may 
determine to have such orders rerouted only when the NBBO is crossed 
but not locked.\6\ The appropriate FPC may also determine to have 
orders be rejected only when the CBOE's market becomes crossed or 
locked as a result of the step-up amount having been applied to a 
particular options series. Also, the FPC may determine to allow for 
automatic executions of the orders notwithstanding that the NBBO is 
crossed or locked (assuming no other reason for the order to be 
rerouted exists) if the circumstances warrant such action to maintain a 
fair and orderly market.
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    \6\ The Commission recently published an order declaring 
immediately effective CBOE's proposal to adopt new Interpretation 
.08 to Rule 6.8. New Interpretation .08 requires a RAES order to be 
rerouted for representation in the trading crowd when the CBOE 
market becomes crossed as a result of quotes ``stepping-up'' to 
match the NBBO. See Securities Exchange Act Release No. 42012 
(October 15, 1999), 64 FR 57502 (October 25, 1999). The current 
filing will supersede that filing because it will provide the 
appropriate FPC with the discretion to have orders rejected from 
RAES when the CBOE market is not only crossed as a result of quotes 
``stepping-up'' to match the NBBO, but also when it becomes locked 
as a result of application of the ``step-up'' Interpretation.
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    The proposed rule would allow for the rerouting of RAES orders of a 
particular class notwithstanding that the orders of that particular 
class may not have been designated to automatically step up to the NBBO 
and notwithstanding that the NBBO may be more ticks away from the CBOE 
market than the designated step-up amount. Nonetheless, the CBOE 
believes that market makers are at risk for filling orders 
automatically in situations in which the NBBO is crossed or locked even 
if they are not stepping up to the NBBO on RAES because the fact that 
the NBBO is crossed or locked may be an indication that the prices are 
inaccurate. The NBBO may become crossed or locked because of 
communications or systems problems, or due to keystroke errors, or 
quotation dissemination delays. The proposal will allow the floor 
broker or DPM to determine if the locked or crossed market is actually 
a true market.
2. Statutory Basis
    The CBOE believes that this proposal will enhance its ability to 
provide instantaneous, automatic execution of public customers' orders 
at the best available prices. This furthers the objectives of Section 
6(b) of the Act \7\ in general and furthers the objectives of Section 
6(b)(5) \8\ in particular by promoting just and equitable principles of 
trade, removing impediments to and perfecting the mechanism of a free 
and open market and national market system, and protecting investors 
and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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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, Participants 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 
Amendment No. 1 and Timing for Commission Action

    The proposed rule filing has been filed by the Exchange pursuant to 
Section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) of Rule 19b-
4 thereunder.\10\ The proposed rule change: (i) Does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; and (iii) does not 
become operative until thirty days after the date of filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, provided that the 
Exchange 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.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date of the proposal. In addition, the Exchange 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 the filing 
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 it will limit 
market-maker risk in situations where the NBBO becomes locked or 
crossed, by removing the requirement that market-makers execute 
transactions at prices that may not accurately reflect true market 
prices at the time the trade is initiated. 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.
    The Commission requests, however, that the CBOE provide it with 
information regarding the occasions in which the Interpretation is 
applied and the promptness of the manual execution of orders that are 
prevented from automatic execution by operation of the Interpretation. 
This data should cover, at a minimum, the period commencing as of the 
proposed Interpretation's operative date and concluding six months 
thereafter.
    At any time within 60 days of the filing of this rule change, the 
Commission may summarily abrogate the 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.\11\
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    \11\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing,

[[Page 66956]]

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, 
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 CBOE. All submissions 
should refer to File Number SR-CBOE-99-57 and should be submitted by 
December 21, 1999.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-31028 Filed 11-29-99; 8:45 am]
BILLING CODE 8010-01-M