[Federal Register Volume 65, Number 151 (Friday, August 4, 2000)]
[Notices]
[Pages 48033-48035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19736]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43087; File No. SR-CBOE-00-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Prohibition of Certain Electronically Generated Orders From Being 
Entered in the Order Routing System

July 28, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is given that on 
February 9, 2000, the Chicago Board Options Exchange, Incorporated 
(``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. On March 6, 2000, the CBOE filed with the Commission 
Amendment No. 1 to the proposed rule change.\3\ On April 28, 2000, the 
CBOE filed with the Commission Amendment No. 2 to the proposed rule 
change.\4\ On July 10, 2000, the CBOE filed with the Commission 
Amendment No. 3 to the proposed rule change.\5\ the Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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, Regulatory 
Policy, CBOE, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated March 3, 2000 
(``Amendment No. 1''). In Amendment No. 1, the Exchange proposed to 
create a new rule, ``Electronically Generated and Communicated 
Orders,'' rather than including the proposed rule language as a 
subsection in another rule.
    \4\ See letter from Timothy Thompson, Director, Regulatory 
Policy, CBOE, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated April 27, 2000 (``Amendment No. 2''). In Amendment 
No. 2, among other things, the Exchange proposed to prohibit 
electronically generated orders only if they were eligible for 
execution on the Exchange's Retail Automatic Execution System 
(``RAES'').
    \5\ See letter from Timothy Thompson, Director, Regulatory 
Policy, CBOE, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated July 6, 2000 (``Amendment No. 3''). In Amendment 
No. 3, among other things, the Exchange revised its statement 
regarding the purpose of the proposed rule change. In addition, the 
Exchange revised the proposed rule language to clarify that 
electronically created orders will be prohibited from entry into the 
Order Routing System (``ORS'') if they are eligible for execution on 
RAES at the time they are sent to the Exchange. Amendment No. 3 also 
clarified the types of orders that are considered to be eligible for 
execution on RAES at the time they are sent.
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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 to prohibit certain 
electronically generated orders from being entered on ORS.

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

    In its filing with the Commission, 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 proposed rule change seeks to restrict the entry of certain 
options orders that are created and communicated electronically, 
without manual input, into ORS.\6\ For this purpose, the Exchange is 
proposing to adopt a new Rule 6.8A, Electronically Generated and 
Communicated Orders.
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    \6\ ORS is the Exchange's automated order trading and routing 
system comprised of the options order routing system, the automatic 
execution system (RAES), the electronic limit order book, and other 
electronic delivery and acceptance systems and terminals.
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    Proposed Rule 6.8A provides that Members may not enter nor permit 
the entry of, orders into ORS if those orders

[[Page 48034]]

are created and communicated electronically without manual input and if 
such orders are eligible for execution on RAES at the time they are 
sent. Order entry by public customers or associated persons of members 
must involve manual input, such as entering the terms of an order into 
an order-entry screen or manually selecting a displayed order against 
which an off-setting order should be sent. The proposed rule states 
that members are not prohibited form electronically communicating to 
the Exchange orders manually entered by customers into front-end 
communication systems (e.g., Internet gateways, online networks, etc.).
    The proposed rule clarifies that an order is eligible for execution 
on RAES if: (1) Its size is equal to or less than the maximum RAES 
order size for the particular series; (2) the order is marketable or is 
tradable pursuant to the RAES auto step-up feature at the time it is 
sent; and (3) the order has either no contingency or has a contingency 
that is accepted for execution by the RAES system. A marketable order 
is a market order or a limit order where the specified price to sell is 
below or at the current bid, or if to buy is above or at the current 
offer. An order is tradable pursuant to the RAES auto step-up feature 
if the appropriate Floor Procedure Committee has designated the class 
as an auto step-up class and if the National Best Bid or Offer for the 
particular series is reflected by the current best bid or offer in 
another market by no more than the step-up amount as defined in 
Interpretation .02 of Rule 6.8.
    The Exchange represents that its business model depends upon market 
makers for competition and liquidity. The Exchange represents that 
public customer orders submitted to the CBOE are provided with certain 
benefits pursuant to various rules of the Exchange, including Rule 6.8, 
RAES Operations, Rule 6.45, Priority of Bids and Offers, Rule 7.4, 
Obligations for Orders, and Rule 8.51, Trading Crowd Firm Disseminated 
Market Quotes. Allowing electronically generated and communicated 
customer orders to be routed directly of ORS and RAES would give 
customers with such electronic systems a significant advantage over 
market makers. The Exchange believes that this could undercut its 
business model. The Exchange notes that under the proposed rule change, 
computer generated orders can still be sent for execution on the 
Exchange; however, they may not be sent for execution through ORS.
    Currently, CBOE member firms and customers who are not located on 
the trading floor may send option orders to the trading floor in 
various ways. First, pursuant to the CBOE's telephone policies, a 
customer in some option classes may telephone an order directly to a 
floor broker in the trading crowd, provided the firm taking the order 
complies with all applicable rules for handling the customer order. In 
other trading crowds, a member firm representative or a customer may 
telephone an order into a member firm booth on the trading floor. From 
here the order may be taken manually into the proper trading crowd and 
represented; alternatively, it may be sent electronically from the 
booth to a floor broker in the trading crowd who will represent it. A 
member firm representative may also send an order to the floor of the 
Exchange pursuant to that firm's proprietary order routing network. The 
CBOE represents that almost every member firm has its own network for 
routing orders to the CBOE. The firm would then route the order to the 
trading crowd in one of the two ways described above. Finally, a member 
firm may send an order to the Exchange through its interface with ORS. 
Eligible orders sent through ORS may be: (1) Automatically executed 
against orders in the limit order book; (2) placed in the limit order 
book; (3) automatically executed via RAES; or (4) routed to a Public 
Access Routing (``PAR'') terminal in the trading crowd.
    Under the proposed rule change, electronically generated and 
communicated orders that are eligible for execution on RAES at the time 
they are sent would be ineligible for routing through ORS. These orders 
could, however, be sent to the trading floor for execution as otherwise 
described above, i.e., by telephone or through a member firm's 
proprietary order routing system.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \7\ in general and furthers the objectives 
of Section 6(b)(5) \8\ in particular by facilitating transactions in 
securities, removing impediments to and perfecting the mechanism of a 
free and open market and a national market system, and promoting just 
and equitable principles of trade.
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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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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 
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 
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 No. SR-CBOE-00-01 and should 
be submitted by August 25, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-19736 Filed 8-3-00; 8:45 am]
BILLING CODE 8010-01-M