[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Notices]
[Pages 72707-72709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33635]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42256; File No. SR-CBOE-99-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Clarify Certain 
Aspects of Interpretation and Policy .02 to Exchange Rule 6.8

December 20, 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 August 19, 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 Exchange. 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

    CBOE proposes to amend its Interpretation and Policy .02 to CBOE 
Rule 6.8 in order to clarify certain aspects of the Interpretation. 
Below is the text of the proposed rule change. Proposed new language is 
italicized.

RAES Operations in Equity Options

Rule 6.8 [No change]
* * * Interpretation and Policy
    .01 [No change].
    .02 Orders to buy or sell options that are multiply traded in one 
or more markets in addition to the Exchange will not be automatically 
executed on RAES at prices inferior to the current best bid or offer in 
any other market, as such best bids or offers are identified in RAES. 
In respect of those classes of options that

[[Page 72708]]

have been specifically designated by the appropriate Floor Procedure 
Committee as coming within the scope of this sentence (``automatic 
step-up classes''), under circumstances where the Exchange's best bid 
or offer is inferior to the current best bid or offer in another market 
by no more than the ``step-up amount'' as defined below, such orders 
will be automatically executed on RAES at the current best bid or offer 
in the other market. In respect of automatic step-up classes of options 
under circumstances where the Exchange's best bid or offer is inferior 
to the current best bid or offer in another market by more than the 
step-up amount, or in respect of specified automatic step-up classes or 
series of options or specified markets under circumstances where the 
Chairman of the appropriate Floor Procedure Committee or his designee 
has determined that automatic step-up should not apply because quotes 
in such options or markets are deemed not to be reliable, or in respect 
of classes of options other than automatic step-up classes where the 
Exchange's best bid or offer is inferior to the current best bid or 
offer in another market by any amount, such orders will be rerouted by 
the DPM or OBO for that class of options for non-automated handling. 
The DPM or OBO will report the execution or non-execution of such 
orders to the firm that to originally forwarded the order to RAES. As 
used in this Interpretation and Policy .02, the term ``step-up amount'' 
shall mean the minimum increment for options of that series established 
pursuant to Rule 6.42, or any greater amount established by the 
appropriate Floor Procedure Committee in respect of specified automatic 
step-up classes or series of options. The procedures described in this 
Interpretation .02 shall not apply in circumstances where a ``fast 
market'' in the options that are the subject of the orders in question 
has been declared on the Exchange or where comparable conditions exist 
in the other market such that firm quote requirements do not apply. 
Under circumstances where the Chairman of the appropriate Floor 
Procedure Committee or his designee determines that quotes from one or 
more particular markets in one or more classes of options are not 
reliable, the Chairman or designee may direct the senior person in 
charge of the Exchange's Control Room to exclude the unreliable quotes 
from the RAES determination of the NBBO in the particular option 
class(es) through the end of that trading day, or until the quotes are 
determined to be reliable again whichever occurs first.

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 comment 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
    Interpretation and Policy .02 to CBOE Rule 6.8 provides that orders 
to buy or sell equity options that are multiply traded in one or more 
markets in addition to the CBOE will not be executed on the CBOE's 
Retail Automatic Execution System (``RAES'') at prices inferior to the 
current best bid or offer in any other market (known as the National 
Best Bid or Offer, or ``NBBO''), as the NBBO is identified in RAES.
    The proposed rule change makes three clarifications to this 
Interpretation: (1) It clarifies that one or more markets may be turned 
off from the NBBO calculation while still checking the prices on other 
markets; (2) it specifies the individuals vested with authority to make 
the determination to exclude a market; and (3) it clarifies the 
situation(s) under which such determinations may be made.
    Occasionally, bids and offers in certain options from a particular 
market may not be reliable, whether due to unusual market conditions, 
systems problems, failure by another market's specialist to update 
quotes, or other causes. The language of the current Interpretation and 
Policy .02 is ambiguous about whether the Exchange has any way to avoid 
executing RAES trades at these inaccurate prices except to turn off 
NBBO execution altogether for affected option classes.\3\ If the NBBO 
execution was thus turned off, public customers receiving executions 
through the RAES system would lose the potential benefits of an 
execution at the NBBO, even when the inaccurate quotes are only coming 
from one particular exchange.
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    \3\ While Interpretation .02 currently provides that the 
procedures for NBBO executions ``shall not apply'' if a ``fast 
market'' has been declared, or if the firm quote requirements do not 
apply at the other market, the Interpretation could be read to 
require that NBBO be turned off. The Exchange intended for the rule 
to have the latter interpretation, and has interpreted the rule as 
such.
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    The proposed change will clarify the Exchange's current 
Interpretation, which allows a market to be excluded individually. It 
will make clear that the Exchange can keep filling orders at the best 
prices available at any market not experiencing quote reliability 
problems by removing the unreliable quotes from the RAES determination 
of the NBBO. The unreliable quotes may be excluded from the NBBO 
determination until such times as either the quotes become reliable 
again, or trading ends for the day--whichever occurs first. This change 
will clarify that Exchange public customers may receive RAES execution 
of their orders at the best price available at multiple exchanges more 
frequently and with less uncertainty.
    The proposed change also will vest responsibility and discretion 
for determining the reliability of quotes from a particular exchange on 
a particular option class with the Chairman of the appropriate Floor 
Procedures Committee or his designee--the same procedure that currently 
applies under Interpretation and Policy .02 for determining when the 
``automatic step-up'' procedure should not apply.\4\
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    \4\ See Release No. 34-40096 (June 16, 1998), 63 FR 34209 (June 
23, 1998).
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    Finally, the proposed change seeks to better describe the 
circumstances when a market may be excluded from the NBBO. Currently, 
the rule states that the NBBO procedures in the Interpretation shall 
not apply when a ``fast market'' has been declared at the Exchange or 
another market, or when comparable conditions exist such that the firm 
quote requirements do not apply. When the Exchange or another market 
declares a ``fast market,'' an indication is sent out alerting the 
public to that fact. However, it will not always be known when another 
market has taken the step of suspending firm quote requirements in an 
option class. The Exchange, by contrast, will often know if there are 
problems with quotes in one or more option classes at another market 
because the trading crowds at the Exchange continuously monitor the 
other markets. Under the proposed Interpretation, if another market's 
quotes appear to be unreliable, the trading crowd or Exchange officials 
can bring this to the attention of the Chairman of the appropriate 
Floor Procedure Committee or his designee, who in turn can arrange

[[Page 72709]]

to contact the other market directly to confirm whether there is a 
problem with the quotes.
2. Statutory Basis
    CBOE believes that the proposed change in Interpretation and Policy 
.02 is consistent with and is furtherance of the provisions of Section 
6(b)(5) \5\ of the Act. By making clear that the Exchange has greater 
flexibility to keep RAES executing orders at the NBBO, CBOE believes 
that public customers will receive better executions of their orders 
more frequently. This will improve the efficiency of RAES, thereby 
removing impediments to, and perfecting the mechanism of, a free and 
open market and a national market system, and thus protecting investors 
and the public interest.
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    \5\ 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 not necessary or appropriate in furtherance 
of the purposes of the Act.

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 Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
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 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 the 
CBOE. All submissions should refer to File No. SR-CBOE-99-45 and should 
be submitted by January 18, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33635 Filed 12-27-99; 8:45 am]
BILLING CODE 8010-01-M