[Federal Register Volume 65, Number 169 (Wednesday, August 30, 2000)]
[Notices]
[Pages 52800-52802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22169]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43196; File No. SR-CBOE-00-38]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Documentation of Actions Taken With 
Respect to its Retail Automatic Execution System.

August 22, 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 August 11, 2000, the Chicago Board Options Exchange, Incorporated 
(``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 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 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to codify its current practice of documenting 
the reasons for certain actions taken by Exchange officials with 
respect to its operation of the Retail Automatic Execution System 
(``RAES''). The Exchange has filed the proposed rule change as 
constituting a stated policy, practice, or interpretation with respect 
to the meaning, administration, or enforcement of an existing Exchange 
rule.\3\
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    \3\ 17 CFR 240.19b-4(f)(1).
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    The text of the proposed rule change is available at the CBOE and 
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

    The purpose of the proposed rule change is to add an Interpretation 
to Exchange Rule 6.8, RAES Operations (``RAES Rule''), in order to 
codify the Exchange's existing practice of documenting the reasons for 
actions taken by Exchange officials that result either in the 
deactivation of RAES or in the operation of RAES in other than the 
normal manner (``RAES Action'' or ``RAES Actions'').
Background
    The RAES Rule details the operation of the Exchange's RAES system, 
including which orders are eligible for execution on RAES; how eligible 
order size is determined; how execution price is determined; how 
market-makers are assigned to RAES trades; when otherwise eligible 
orders are rejected from RAES for manual handling; and under what 
circumstances RAES may be disengaged. Furthermore, Exchange Rule 6.6, 
Unusual Market Conditions (``Fast Market Rule''), provides authority 
for deactivating RAES and for deactivating the feature of RAES that 
causes RAES orders to be rejected and rerouted for manual execution 
(``RAES Reject Feature''). The CBOE represents that the provisions of 
the RAES Rule and the Fast Market Rule present members and investors 
with a clear description of: (1) Exactly how an order may be handled by 
the RAES system; and (2) the circumstances under which RAES 
Deactivation or Non-Normal Operation Action may be taken.
Current Documentation Procedures
    The CBOE represents that it has long employed procedures for 
ensuring that a RAES Action is taken pursuant to authority under 
Exchange rules. One such procedure, required in connection with all 
such RAES Actions, is the documentation of the reasons for any RAES 
Action taken. The Exchange represents that it has required reasons for 
each such RAES Action taken to be recorded in a Control Room log. The 
log contains, among other information, a description of the RAES 
Action; an annotation as to the time of the RAES Action; a list of 
option classes affected by the particular RAES Action; and a brief 
summary of the reasons for each RAES Action.\4\
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    \4\ In a telephone conversation between Tim Thompson, Assistant 
General Counsel, CBOE, and Steven G. Johnston, Special Counsel, 
Division of Market Regulation, Commission, August 16, 2000, the 
Exchange clarified various aspects of the proposed rule change 
(``Telephone conversation with the CBOE'').

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[[Page 52801]]

    The CBOE also represents that it employs a number of methods for 
notifying Exchange members and the public about any RAES Actions. These 
methods include making an announcement over the trading floor public 
address system; generating a printer message and sending it to the 
floor operations of member firms; and attaching an ``F'' indicator 
(indicating that a ``fast market'' has been declared) to price and 
quote information for affected option classes. In short, the Exchange 
represents that the provisions of the CBOE rules regarding the 
operation of RAES and the procedures for ensuring proper application of 
the rules and methods employed to notify members and the public of a 
RAES Action indicate that the Exchange is dedicated to ensuring that 
both members and investors are well informed about the operation of 
RAES and the circumstances under which RAES may be unavailable.\5\
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    \5\ Telephone conversation with CBOE.
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Proposed Rule
    The CBOE is now proposing to add an Interpretation .08 to the RAES 
Rule. This change would codify the Exchange's current practice of 
documenting the reasons for taking any RAES Action. The following rules 
provide specific authority for taking such Action:
    Fast Market Rule. CBOE Rule 6.6(a) states that ``[w]henever in the 
judgment of two Floor Officials, because of an influx of orders or 
other unusual conditions or circumstances, the interest of a fair and 
orderly market so require, those Floor Officials may declare the market 
in one or more options classes to be `fast'.'' The Fast Market Rule 
further provides that if a market is declared fast, any two Floor 
Officials have authority to take various actions with respect to the 
class or classes of options declared to be in a fast market. These 
actions include, but are not limited to, turning off RAES in the 
applicable class or classes.
    Temporary Deactivation of RAES by Post Director or Order Book 
Official. Rule 6.6(e) provides that a Post Director at a trading 
station (in the case of a Designated Primary Market maker (``DPM'') 
crowd) or an order Book Official (``OBO'') at a trading station (in the 
case of a non-DPM trading crowd) may turn off RAES for a class or 
classes of option contracts traded at that station for a period of time 
not to exceed five minutes if, because of an influx of orders or 
unusual conditions or circumstances in respect of such options or their 
underlying securities, the Post Director or OBO determines that such 
action is appropriate in the interest of maintaining a fair and orderly 
market.
    Automatic Deactivation of RAES Due to News Announcements. Rule 6.6, 
Interpretation .01, codifies the Exchange's implementation of an 
automatic system that monitors news announcements (``Monitoring 
System'') pertaining to underlying stocks. Monitoring commences shortly 
before the close of trading in the primary markets for underlying 
stocks and continues as long as stock options continue to be traded. 
RAES executions are suspended in a particular class of stock options 
wherever the Monitoring System discovers that a news announcement has 
been made pertaining to the underlying stock. Two Floor Officials, who 
are immediately notified of the action, must consider whether to resume 
normal operation of RAES in the particular option class.
    Deactivation of RAES by Control Room Due to Systems Malfunction. 
Under CBOE Rule 6.8, Interpretation .03, the senior person in charge of 
the Exchange's Control Room has authority to turn off RAES for a class 
of options if a system malfunction affects the Exchange's ability to 
disseminate or update market quotes.
    Change in Eligible RAES Order Size. Under CBOE Rule 6.8, 
Interpretation .05, the Chairman of the appropriate Floor Procedure 
Committee or the Chairman's designee has the authority to increase the 
size of orders in one or more classes of options when the Chairman or 
his designee believes that such action is in the interest of 
alleviating a potential backlog of unexecuted orders.\6\
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    \6\ The Exchange has also filed a proposed rule change, with the 
Commission, (SR-CBOE-00-10), that would permit the Chairman or his 
designee to decrease the eligible RAES size in circumstances that 
the Exchange deems appropriate. The proposed rule change was 
published for public comment in Securities Exchange Act Release No. 
428262 (May 30, 2000), 65 FR 36481 (June 8, 2000).
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    Switching Off ``RAES Reject Feature'' Due to Fast Market. CBOE Rule 
6.8, Interpretation .02, provides that the ``RAES Reject Feature'' may 
be switched off for a particular class of options in circumstances 
where a fast market in the options class has been declared.
    Switching Off ``RAES Reject Feature'' When Comparable Conditions 
Exist in Other Markets. Rule 6.8, Interpretation .02 provides that the 
``RAES Reject Feature'' may be switched off where conditions comparable 
to a fast market exist in another market such that firm quote 
requirements do not apply.
    The CBOE represents that whenever a RAES Action is taken pursuant 
to one of the rules above--whether by Floor Officials, through the 
operation of the Monitoring System, or by the senior person in the 
Exchange's Control Room--the RAES Action and the reasons therefore are 
recorded in the Control Room log. The CBOE rules may stipulate that a 
RAES Action be taken, e.g., in the case of news announcements 
pertaining to underlying stocks. Other RAES Actions, however, are at 
the discretion of Floor Officials. The Exchange represents that Floor 
Officials may, for example, take a RAES Action when quotes disseminated 
by CBOE are inaccurate (this infrequently may occur due to problems 
with automatic price quotation systems or because of inaccurate 
underlying market quotes); the spread in an underlying security's 
quotation suddenly widens; an underlying quote becomes inverted; or 
there are extreme disparities between quotes disseminated by various 
exchanges.\7\
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    \7\ Telephone conversation with the CBOE.
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    The proposed rule would codify the Exchange's requirement that 
reasons for taking any RAES Action be documented. The Exchange 
represents that such Action includes deactivating RAES or switching off 
the ``RAES Reject Feature''; changing the parameters of the eligible 
RAES order size; or otherwise operating RAES in other than the normal 
manner. The proposed rule would ensure that the Control Room log 
contains a historical record of the time any RAES Actions was taken, as 
well as the circumstances under which it was taken. The Exchange 
represents, therefore, that the proposed rule change is consistent 
with, and furthers the objectives of section 6(b)(5) of the Act \8\ in 
that it is designed to remove impediments to a free and open market and 
protect investors and the public interst.\9\
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Telephone conversation with the CBOE.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE represents that it does not believe 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.

[[Page 52802]]

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)(i) \10\ of the Act and Rule 19b-4(f)(1) thereunder.\11\ At 
any time within 60 days of the filing of such 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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    \10\ 15 U.S.C. 78s(b)(3)(A)(i).
    \11\ 17 CFR 240.19b-4(f)(1).
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IV. Solicitation of Comments

    Interested persons are invited 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. 
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 Section. 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-00-38 in the 
caption above and should be submitted by September 20, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22169 Filed 8-29-00; 8:45 am]
BILLING CODE 8010-01-M