[Federal Register Volume 65, Number 166 (Friday, August 25, 2000)]
[Notices]
[Pages 51884-51885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21743]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43185; File No. SR-CBOE-00-30]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., Relating to the Routing of Cancel Replace Orders

August 21, 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 July 14, 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 CBOE. 
On August 10, 2000, the CBOE submitted Amendment No. 1 to the proposed 
rule change.\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, Assistant General Counsel, 
Legal Department, CBOE, to Kelly Riley, Division of Market 
Regulation, SEC, dated August 9, 2000 (``Amendment No. 1''). In 
Amendment No. 1, the CBOE clarified the purpose section and set 
forth its anticipated implementation schedule.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to implement a systems change to its Order 
Routing System (``ORS'') to provide for the automatic rerouting of 
cancel replace orders.

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, Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to implement a systems 
change to provide for the automatic rerouting of cancel replace orders.
    a. Background. Currently, when orders residing on the Exchange's 
electronic book (``Ebook'') are replaced at the market, the original 
order will be canceled and the marketable replace order will be placed 
on the ``Live Ammo'' trading screen. Previously, this marketable 
replace order has waited on the Live Ammo screen until, one by one, 
each order was traded. The replace order was not immediately displayed 
as part of the best book bid or ask, and was not reflected in the 
market quote until the order was individually addressed by either the 
designated primary market maker (``DPM'') or order book official 
(``OBO'') handling the Ebook.\4\
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    \4\ In most cases, staff of the DPM operates Ebook for the 
option classes assigned to them.
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    To provide for certain of these Live Ammo orders to be addressed in 
a more automated and expedited fashion, the Exchange developed a system 
\5\ that allows for a Live Ammo order (or a group of Live Ammo orders) 
to be manually selected by the DPM or OBO. Once selected, the system 
developed by the Exchange evaluates each selected order and routes it 
to one of three locations depending on the routing parameters then in 
place and the terms of the particular order. If the order is marketable 
and otherwise meets all of the eligibility criteria for execution on 
the Exchange's Retail Automatic Execution Systems (``RAES''), the order 
will be routed to RAES and executed

[[Page 51885]]

automatically. If the order is not RAES-eligible, it will be routed to 
Ebook or back to Live Ammo depending on the existing routing parameters 
in place.
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    \5\ The Commission approved the Exchange's Live Ammo processing 
system on a pilot basis earlier this year. The pilot expires October 
31, 2000. Securities Exchange Act Release No. 42379 (February 2, 
2000), 65 FR 6665 (February 10, 2000) (File No. SR-CBOE-98-27).
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    b. Proposed System Changes to Address Commission Expectations. In 
the Commission's order approving the Exchange's Live Ammo processing 
system on a plot basis, the Commission stated that it expects ``that 
the Exchange will make the necessary systems enhancements to ensure 
that a maximum number of customer orders in the CBOE system are matched 
against one another.'' \6\ The Exchange began to address the 
Commission's desire for customer order matching opportunities and its 
own desire to more efficiently process customer orders even before the 
Commission issued the Live Ammo approval order by developing and 
implementing an Automated Book Priority (``ABP'') system that trades 
incoming RAES orders against orders in the Exchange's limit order 
book.\7\ The Exchange also will continue to consider other system 
changes to provide for further matching opportunities for customer 
orders.
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    \6\ See supra note 5.
    \7\ See Securities Act Release No. 41995 (October 8, 1999), 64 
FR 56547 (October 20, 1999).
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    The Commission further stated in its approval order that it expects 
``that the Exchange will develop the necessary systems enhancements to 
ensure that . . . RAES-eligible orders will be routed directly to RAES 
without the interim step of appearing first on the Live Ammo screen.'' 
\8\ The Exchange believes that the proposed system change, discussed 
below, addresses the Commission's expectations for a system to route 
orders to RAES without the interim step of appearing first on the Live 
Ammo screen.
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    \8\ See supra note 5.
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    c. New System. The proposed new system would process a cancel 
replace order for an order residing on Ebook by routing the cancel 
replace order through the Exchange's ORS as a new order, after the 
cancel portion has been completed. Normal parameter routing would be 
evaluated for this order, including the firm volume edits. The replace 
order, as with any new incoming order, may be eligible for RAES 
execution, crossing with other Ebook orders through ABP, routing 
directly into the book (automatically updating the quote if it improves 
the market), or routing to a broker's Public Automated Routing 
(``PAR'') terminal or Booth Automated Routing terminal (``BART'') for 
potential price improvement.
    The Exchange believes that the proposed system change will have a 
number of benefits including a reduction of order flow to Live Ammo 
where manual intervention is required for execution,\9\ and fair 
pricing, increased speed and efficiency of execution for customer 
replace orders. The system also will ensure that orders that are 
rerouted to the book will be reflected in the best bid or offer in a 
timely manner.
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    \9\ According to the Exchange, although the majority of orders 
on the Exchange's Live Ammo screen are cancel replace orders to the 
market or to some marketable limit, orders can appear on the Live 
Ammo screen in a few other situations. Consequently, although the 
number of Live Ammo orders should be substantially reduced, there 
occasionally may still be circumstances when the DPM staff may have 
reason to reroute live ammo orders manually pursuant to this system.
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    d. Implementation. The Exchange intends to implement the proposed 
systems change as soon as the required testing has been completed. The 
Exchange anticipates that the system will be implemented at the end of 
August 2000 or the beginning of September 2000. Once implemented, the 
system will be active for every options class traded on the Exchange.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) of the Act \10\ 
because it is designed to remove impediments to a free and open market 
and to protect investors and the public interest.
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    \10\ 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 Timing 
for Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and subparagraph (f)(5) of Rule 19b-4 \12\ 
under the Act as a systems change that: (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 
have the effect of limiting the access to or availability of the 
system. 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.
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    \11\ 15 U.S.C. 78s(b)(3).
    \12\ 17 CFR 240.19b-4(f)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 No. SR-
CBOE-00-30 and should be submitted by September 15, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21743 Filed 8-24-00; 8:45 am]
BILLING CODE 8010-01-M