[Federal Register Volume 65, Number 68 (Friday, April 7, 2000)]
[Notices]
[Pages 18397-18399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8489]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42596; File No. SR-CBOE-00-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Extending for Six Months the Rapid Opening System 
(``ROS'') Pilot Program

March 30, 2000.
    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 March 22, 2000, 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 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change.
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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 Exchange requests an extension through September 30, 2000, of a 
pilot program established in Exchange Rule 6.2A, which governs the 
operation of, and the eligibility to participate in, the Exchange's 
Rapid Opening System.\3\ The text of the proposed rule change is 
available at the Office of the Secretary, the Exchange, and at the 
Commission.
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    \3\ The pilot program was first approved by the Commission 
effective February 9, 1999 through March 31, 2000. See Securities 
Exchange Act Release No. 41033 (February 9, 1999), 64 FR 8156 
(February 18, 1999.)
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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 Exchange 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 Exchange 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 Exchange proposes to extend for six months the Rapid Opening 
System (``ROS'') pilot program.\4\ Before the implementation of ROS, a 
trading crowd on CBOE arrived at the opening price by manually 
progressing through series after series of an options class. Open 
trading for any of the class' series could not commence until all 
series in the class had undergone the process.\5\ ROS allows the 
Exchange to automate the opening of its various option classes, thereby 
avoiding the lengthier opening rotations that can occur under 
circumstances when there is a large influx of orders entered before or 
during the opening rotation. As the opening occurs, fill reports on all 
participating orders are generated automatically, opening market quotes 
and last sales will be disseminated, and market-makers will receive 
notification of assigned trades. In addition, as part of the pilot, the 
Exchange has developed a manual procedure for incorporating orders 
currently not included on CBOE's Electronic Book, known as non-bookable 
orders,\6\ into the opening process.\7\
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    \4\ Id.
    \5\ Id.
    \6\ Telephone conversation between Tim Thompson, Director of 
Regulatory Affairs, CBOE, and Terri Evans, Special Counsel, Division 
of Market Regulation (``Division''), SEC, March 28, 2000 (clarifying 
the definition of non-bookable orders and the manual entry of such 
orders.
    \7\ The Pacific Exchange, Inc. (``PCX'') has adopted a similar 
procedure for manually handling non-bookable orders in connection 
with the use of the PCX's Automated Opening Rotation system. See 
Securities Exchange Act Release No. 41970 (September 30, 1999), 64 
FR 54713 (October 7, 1999).
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    The CBOE represents that its experience with ROS over the past year 
has been positive. Member firms have

[[Page 18398]]

told CBOE that they appreciate how ROS enables the Exchange to enter 
into opening trading much sooner, allowing them to represent their 
customer orders in open outcry. The Exchange believes that ROS has 
prevented large numbers of orders from queuing on the Exchange's book 
and ``live ammo'' screens immediately after the opening, thus providing 
Designated Primary Market-Maker (``DPM'') staff with the ability to 
handle orders in a more expeditious manner. The Exchange further 
represents that trading crowds have been able to open classes using ROS 
within seconds of the dissemination of the opening part in the 
underlying security.
    The Exchange also believes that the current procedure for manually 
incorporating non-bookable orders has been adequate to provide these 
orders with the executions that they deserve on the opening. In fact, 
the Exchange has observed that many firms currently choose to wait 
until after the opening has been completed to represent their orders 
because of the short time needed to complete a ROS opening and because 
the firms have a better sense of where they may trade the order after 
the opening and after opening quotes have been disseminated. The 
Exchange represents, however, that it will continue to explore 
possibilities for including non-bookable orders \8\ into ROS in an 
automated fashion. The Exchange is actively studying the possibility of 
changing its book to allow for the inclusion of non-bookable orders,\9\ 
at least at the opening. These changes to the Exchange's book would 
allow ROS to electronically accommodate non-bookable orders.\10\
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    \8\ Telephone conversation between Tim Thompson, Director of 
Regulatory Affairs, CBOE, and Terri Evans, Special Counsel, 
Division, SEC, March 28, 2000.
    \9\ Id.
    \10\ Id.
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    In the Commission's approval order of the ROS system, the 
Commission requested the Exchange to study issues related to the SEC's 
concerns during the pilot period and to report back to the Commission 
at least sixty days prior to seeking permanent approval of ROS.\11\ The 
Exchange is now preparing a report to the Commission and will seek 
permanent approval of ROS in the next couple of months. In the 
meantime, the extension of the pilot period will allow the Exchange to 
continue to utilize ROS.
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    \11\ See Securities Exchange Act Release No. 41033 (February 9, 
1999), 64 FR 8156 (February 18, 1999).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\12\ in general and furthers the objectives of Section 6(b)(5) \13\ in 
particular in that it is designed to promote just and equitable 
principles of trade and to protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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

    CBOE has neither solicited nor received comments on the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) \15\ thereunder 
because the proposal: (1) Does not significantly affect the protection 
of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
prior to 30 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. 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, at least five business days prior to the date of the filing the 
proposed rule change as required by Rule 19b-4(f)(6).
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(16) \16\ normally 
does not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate 
such shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission designate such shorter time period so that the proposed rule 
change may become operative no later than March 31, 2000. The immediate 
effectiveness would allow the current ROS pilot program to continue 
uninterrupted, while allowing the Exchange the opportunity to prepare a 
report for the Commission prior to seeking permanent approval.
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    \16\ Id.
    \17\ 17 CFR 240.19b-4(f)(6)(iii)
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative immediately upon filing for the following reasons. The 
proposed rule change extends the expiration date of the ROS pilot 
program from March 31, 2000, to September 30, 2000. An extension would 
allow the Exchange to continue to offer ROS without interruption and 
provide the Exchange more time to complete its review and evaluation of 
the ROS pilot program.\18\ The Commission notes that the CBOE's filing 
was also the subject of prior notice and comment when it was first 
proposed over a year ago.
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    \18\ Further, the Commission approved a similar system proposed 
by the PCX on a pilot basis until September 30, 2000. See Securities 
Exchange Act Release No. 41970, supra note 7.
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    Among the issues that the Commission expects the CBOE to explore in 
its report are: how and when market-makers set ROS risk and size 
thresholds; how often such thresholds are exceeded and result in the 
adjustment of AutoQuote; the effect of AutoQuote adjustments on the 
quality of customer executions; any effects on existing order execution 
priority; and the handling of an adjustments made for non-bookable 
orders.\19\ The Commission also expects that the Exchange will provide 
a workable plan for the electronic incorporation of non-bookable orders 
on ROS.\20\
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    \19\ See Securities Exchange Act Release No. 41033, supra note 
3.
    \20\ Id.
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    Based on the above reasons, the Commission believes it is 
consistent with the protection of investors and the public interest 
that the proposed rule change become operative immediately upon the 
date of filing, March 22, 2000. 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.\21\
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    \21\ 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 18399]]

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 at the Commission's Public 
Reference Room.
    Copies of such filing will also be available for inspection and 
copying at the principal office of the Exchange. All submissions should 
refer to File No. SR-CBOE-00-09 and should be submitted by April 28, 
2000.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-8489 Filed 4-6-00; 8:45 am]
BILLING CODE 8010-01-M