[Federal Register Volume 65, Number 155 (Thursday, August 10, 2000)]
[Notices]
[Pages 49038-49040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20256]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43113; File No. SR-CBOE-00-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by Chicago Board Options 
Exchange, Inc. Relating to the Adoption of the CBOE Best Executive 
Assurance Program

    Pursuant to section 19(b)(2) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 2, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or the ``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. 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 240.19-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to adopt the ``CBOE Best Executive Assurance 
Program \SM\'' (``BestEx\SM\''), which consists of existing Exchange 
rules and procedures, and to file the same as a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of those rules and procedures.

[[Page 49039]]

    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

    Currently, the obligation of broker-dealers to provide best 
execution of their customers' orders is receiving increasing attention 
in the options markets. In part this is due to the fact that a greater 
number of options are traded in multiple markets than has been the case 
historically, which means that brokers now have greater choices 
concerning where to direct their customers' orders from execution. It 
is also due to a practice known as payment for order flow, whereby 
specialists or market makers offer to pay a specified amount to brokers 
for directing orders to them. This practice, which was introduced a 
number of years ago in the over-the-counter stock market and on certain 
regional stock exchanges, has now begun to appear in options markets, 
most recently including the CBOE.\3\ the availability of payment for 
order flow has made it more important for firms to be able to 
demonstrate that they have given first priority to the obligation to 
provide best execution of their customers' orders, and have not 
permitted this obligation to be compromised by the firms' self-interest 
in obtaining such payment.\4\
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    \3\ The CBOE recently implemented a marketing fee that allows 
funds to be made available to DMPs for their use in paying for order 
flow. See Securities Exchange Act Release No. 43112 (August 3, 
2000), File No. SR-CBOE-00-28.
    \4\ In connection with the Exchange's implementation of the 
marketing fee to be used to attract order flow to the Exchange, the 
CBOE recently issued Regulatory Circular RG00-109, which describes 
regulatory issues raised by payment for order flow. Among other 
things, the Regulatory Circular emphasizes the obligation of member 
firms to provide best execution of their customers' orders without 
regard to considerations of payment for order flows.
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    In order to make its members aware of how the CBOE's systems, 
procedures and rules help them satisfy their best execution obligations 
when they direct orders to the CBOE for execution, the CBOE has 
recently announced its intention to introduce the BestEx program.\5\ 
The BestEx program is based on existing rules of the CBOE that govern 
the operation of its auction market, including its Retail Automatic 
Execution System (``RAES''), and on Exchange systems such as the Order 
Routing System (``ORS'') and Public Automated Routing (``PAR'') 
workstations and on certain recent enhancements to those systems.
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    \5\ The BestEx Program is described in Exhibit A to the proposed 
rule change, which is available at the places specified in item IV 
below.
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    The BestEx program applies to customer orders received through ORS. 
The first step in processing these orders to assure that executions 
take place at the best available price is to direct all orders received 
over ORS that appear to be RAES-eligible to RAES for execution in 
accordance with Exchange Rule 6.8. Interpretation and Policy .02 under 
that Rule provides that no orders may be executed on RAES at a price 
that is inferior to the national best bid or offer (``NBBO'') as 
identified in RAES. Instead, these orders are either executed 
automatically in RAES at the NBBO, or, if the NBBO is better than the 
RAES price by more than an established ``step-up amount,'' the orders 
are rerouted to PAR. Customer orders received over ORS that do not 
appear to be RAES-eligible go directly to PAR.
    Recent enhancements to PAR provide enhanced access to NBBO pricing 
information at the workstation. This places the floor broker in a 
position to know that an execution on CBOE will be at a price that is 
at least as good as the NBBO, unless there are valid reasons for 
believing that what appears to be a better price in another market is 
not obtainable or is otherwise not desired. Finally, in the event that 
an ORS order is executed on the CBOE at a price inferior to the NBBO, 
an advisory to that effect will automatically be sent to designated 
regulatory staff on the Exchange Floor, who will assist the members 
involved in the trade in deciding whether a price adjustment is called 
for under the circumstances.
    As part of the BestEx Program, the Exchange will distribute daily 
and monthly reports to each member firm that identify orders that may 
have been executed outside of the NBBO, show what if any action was 
taken to adjust the price, and provide statistical data to enable firms 
to do their own analysis of the extent to which orders directed to the 
CBOE receive best execution. The combination of these systems, rules 
and procedures are designed to place members of the CBOE in a better 
position to know what is the NBBO at any time, and to give them greater 
assurance that the orders they direct to the CBOE over ORS will receive 
best execution. The CBOE recognizes that the current competitive 
environment has placed greater emphasis on the best execution 
obligations of its members. It is the CBOE's hope that, once members 
are able to employ the data from the BestEx program to demonstrate that 
they have satisfied their duty of best execution of customer orders, 
they will choose to direct more of their orders to the CBOE.
    The Exchange represents that the BestEx program is designed to 
provide member firms with greater assurance that they have acted in a 
manner consistent with the fulfillment of their duty of best execution 
when they direct their customers' orders to the Exchange for execution. 
Accordingly, the Exchange believes that the proposed rule change is 
consistent with, and in furtherance of the objectives of, the Act, 
including specifically Section 6(b)(5) \6\ thereof, which requires the 
rules of exchanges to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and to protect investors and the 
public interest.
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    \6\ 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 that is 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

    Because the CBOE has properly designated the proposed rule change 
as constituting a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule, it has become effective upon filing pursuant to section 
19(b)(3)(A)(i) of the Act \7\ and

[[Page 49040]]

Rule 19b-4(f)(1) thereunder.\8\ At any time within 60 days of the 
filing of this proposed 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.
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    \7\ 15 U.S.C. 78s(b)(3)(A)(i).
    \8\ 17 CFR 240.19b-4(f)(1).
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IV. Solicitation of Comments

    The Commission invites interested persons to submit written data, 
views, and arguments concerning the foregoing. 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 the CBOE.
    All submissions should refer to file No. SR-CBOE-00-32 and should 
be submitted by August 31, 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. 00-20256 Filed 8-9-00; 8:45 am]
BILLING CODE 8010-01-M