[Federal Register Volume 65, Number 203 (Thursday, October 19, 2000)]
[Notices]
[Pages 62776-62779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26804]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43430; File No. SR-CBOE-00-21]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. To Amend its Rule 
Governing the Operation of Its Automated Book Priority System To Permit 
Split-Price Executions

October 11, 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 May 24, 2000, the Chicago Board Options Exchange, Inc. (``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 Exchange. On June 
22, 2000, CBOE filed 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\ In Amendment No. 1, CBOE amended the text of the proposed 
rule change and included a discussion of the indicator to be used 
when a book order is establishing CBOE's best bid or offer. See 
letter from Angelo Evangelou, Attorney, CBOE, to Joseph Corcoran, 
Attorney, Division of Market Regulation, Commission, dated June 20, 
2000 (``Amendment No. 1'').

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[[Page 62777]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend its rules governing the operation of its 
Retail Automatic Execution System (``RAES'') to provide for split-price 
executions under the Automated Book Priority system. Below is the text 
of the proposed rule change. Proposed new language is italicized and 
proposed deletions are in brackets.
Rule 6.8. RAES Operations
    This Rule governs RAES operations in all classes of options, except 
to the extent otherwise expressly provided in this or other Rules in 
respect of specified classes of options.
    (a)(1) Firms on the Exchange's Order Routing System (``ORS'') will 
automatically be on the Exchange's Retail Automatic Execution System 
(``RAES'') for purposes of routing small public customer market or 
marketable limit orders into the RAES system. Those orders which are 
eligible for routing to RAES may be subject to such contingencies as 
the appropriate Floor Procedure Committee (``FPC'') shall approve. 
Public customer orders are orders for accounts other than accounts in 
which a member, non-member participant in a joint-venture with a 
member, or any non-member broker-dealer (including a foreign broker-
dealer as defined in Rule 1.1 (xx)) has an interest. The appropriate 
Floor Procedure Committee (``FPC'') shall determine the size of orders 
eligible for entry into RAES in accordance with paragraph (e) of this 
Rule. For purposes of determining what a small customer order is, a 
customer's order cannot be split up such that its parts are eligible 
for entry into RAES. Firms on ORS have the ability to go on and off ORS 
at will. Firms not on ORS that wish to participate will be given access 
to RAES from terminals at their booths on the floor.
    (ii) When RAES receives an order, the system automatically will 
attach to the order its execution price, determined by the prevailing 
market quote at the time of the order's entry to the system, except as 
otherwise provided in paragraph (b) of this Rule in instances where the 
best bid or offer on the Exchange's book constitutes the prevailing 
market best bid or offer, and as otherwise provided in Interpretation 
and Policy .02 under this Rule 6.8 in respect of multiple-traded 
options. A buy order will pay the offer, a sell order will sell at the 
bid. A Market-Maker logged on to participate in RAES (a ``Participating 
Market-Maker'') will be designated as contra-broker on the trade. A 
trade executed on RAES at an erroneous quote should be treated as a 
trade reported at an erroneous price and adjusted to reflect the 
accurate market after receiving a Floor Official's approval.
    (ii) This rule shall apply to RAES in classes handled by DPM's 
except that the MTS Appointments Committee may make available 
additional series or raise the size of eligible orders in a DPM's 
classes pursuant to Rule 8.80.
    (b) When the best bid or offer on the Exchange's book constitutes 
the best bid or offer on the Exchange and is for a size less than the 
RAES order eligibility size for that class, such fact shall be denoted 
in the Exchange's disseminated quote by a ``Book Indicator''. It is 
possible that the best bid or offer on the Exchange's book constitutes 
the prevailing market bid or offer [may be equal to the best bid or 
offer on the Exchange's book]. In those instances, a RAES order will be 
executed against the order in the book. In the event, the order in the 
book is for a smaller number of contracts than the RAES order, the 
balance of the RAES order will be assigned to participating market-
makers at the same price at which the initial portion [rest] of the 
order was executed up to an amount prescribed by the appropriate Floor 
Procedure Committee on a class-by-class basis (the ``Book Price 
commitment Quantity''). Any remaining balance thereafter shall be (i) 
routed to the crowd PAR terminal if Autoquote is not in effect for that 
series; (ii) assigned to participating market-makers at the Autoquote 
price if Autoquote constitutes the new prevailing market bid or offer; 
or (iii) executed against any order in the book that constitutes the 
new prevailing market bid or offer with the balance of the RAES order 
being assigned to participating market-makers at that price up to the 
Book Price Commitment Quantity. Any additional remaining balance of a 
RAES order shall be handled in accordance with (ii) or (iii) of this 
paragraph.
    (c)-(g) Unchanged.
* * * Interpretations and Policies:
    .01-03  Unchanged.
    .04  In those option classes where the Automated Book Priority 
(``ABP'') system is not operational or has not yet been implemented, if 
a RAES order would be executed at the price of one or more booked 
orders, the order will be rerouted on ORS to either the DPM or to 
another location pursuant to the firm's routing parameters. Under 
ordinary circumstances, in those option classes where the Automated 
Book Priority system is not operational or has not yet been 
implemented, when one or more RAES eligible orders in a class of 
options is re-routed on ORS as described (but not in cases when the 
orders are routed to the firm's booth), the crowd will be obligated to 
sell (buy) the rerouted order (or the first order in any group of 
rerouted orders at the same price) up to the number of contracts 
represented by the booked order(s), plus the Book Price Commitment 
Quantity (as defined in paragraph (b) of this Rule) where applicable, 
[equal to applicable maximum size of RAES eligible orders for that 
class of options] at the offer (bid) which existed at the time of the 
order's entry into the RAES system. Because the first such rerouted 
order will be entitled to a price that existed when the order was 
initially entered into the RAES system, it is imperative that such an 
order be represented by the floor brokers as quickly as possible. 
Orders re-routed to the firm's booth and orders rerouted to the trading 
station that are not entitled to the above protection will be entitled 
to be filled by the trading crowd at the bid or offer existing when the 
Floor Broker represents the order in open outcry in the crowd, pursuant 
to Rule 8.51.
    .05-.08  Unchanged.

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

1. Purpose
    On October 8, 1999, the Commission approved a CBOE rule change 
establishing the Exchange's Automated Book Priority System 
(``ABP'').\4\ ABP allows an order entered into RAES to trade directly 
with an order on the Exchange's customer limit order book in those 
cases where the best bid or offer on the Exchange's book is equal to 
the prevailing market bid or offer. For the option classes in which ABP 
has been

[[Page 62778]]

implemented, CBOE represents that ABP has been beneficial to customers 
by preserving the priority of booked orders and preventing RAES orders 
from being kicked out to the crowd. Accordingly, ABP has aided 
customers using the RAES system as well as customers whose orders are 
in the Exchange's book, because both categories of orders have been 
executed more quickly than they would have been executed otherwise. 
However, a current feature of ABP provides that in the event the order 
in the book is for a smaller number of contracts than the RAES order, 
the entire balance of the RAES order is assigned to participating 
market-makers at the same price at which the initial portion of the 
order was executed against the book, regardless of the next prevailing 
best bid or offer on the Exchange. Thus, if the book contains an order 
for 1 contract that represents the best bid, an incoming market order 
to sell 50 contracts will execute against the book for 1 contract and 
then against the trading crowd for 49 contracts at the book price, 
regardless of the trading crowd's best bid.
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    \4\ See Securities Exchange Act Release No. 34-41995 (October 8, 
1999), 64 FR 56547 (October 20, 1999) (File No. SR-CBOE-99-29).
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    The Exchange now proposes to enhance the ABP system so that RAES 
orders utilizing ABP are executed against the book price up to the 
applicable book volume or a larger amount as pre-determined by the 
appropriate Floor Procedure Committee (``FPC'') for the subject option 
class. That pre-determined contract amount, to be called the ``Book 
Price Commitment Quantity'', would be determined by the FPC, and could 
be set from zero contracts up to the maximum RAES eligible order size 
for that option class. The Exchange anticipates that the FPC will 
mandate a Book Price Commitment Quantity that will generally be uniform 
amongst option classes and that, as such, the established quantity will 
be widely known to CBOE customers and other market participants. 
Nevertheless, the Exchange intends to issue a regulatory circular 
regarding Book Price Commitment Quantity parameters established by the 
FPC. Further, because the FPC would have to conduct a meeting to adjust 
the Book Price Commitment Quantity, it is highly unlikely that the Book 
Price Commitment Quantity would be changed intra-day.
    Thus, if the book contains an order for 1 contract that represents 
the best bid, and the Book Price Commitment Quantity is set to 40, an 
incoming market order to sell 50 contracts, would execute against the 
book for 1 contract and execute against the trading crowd for 39 
contracts on RAES at the book price. Any remaining balance of a RAES 
order would be: (i) Routed to PAR if Autoquote is not in effect for 
that series; (ii) assigned to participating market-makers at the 
Autoquote price if Autoquote represents the best bid or offer; or (iii) 
executed against an order in the book if such order equals or 
represents the best bid or offer--with the balance of the RAES order 
being assigned to participating market-makers at the new book price up 
to the Book Price Commitment Quantity. So long as an order in the book 
equals or represents the next best bid or offer (and Autoquote is in 
effect for the subject series), any remaining balance of a RAES order 
would be handled pursuant to (ii) or (iii) above.
    A ``Book Indicator'' will be affixed to the CBOE disseminated 
quotation when an order in the Exchange's Book represents the best bid 
or offer on the Exchange. This indicator will alert brokers and the 
public that the bid, offer or both are being generated by orders in the 
book, not by market maker quotes. With respect to the Book Indicator, 
the Exchange will disseminate an indicator ``B'' if the bid on the book 
is better than the trading crowd bid; ``O'' if the book offer is better 
than the trading crowd offer; and ``C'' if both the book bid and offer 
are better than the trading crowd bid and offer. However, the indicator 
will not be disseminated if the booked order is for a size greater than 
the RAES order eligibility size for the subject options class since a 
split-price execution would not occur in such instance. This indicator 
will be disseminated in the Special Market Conditions field that also 
includes indicators for, among other things, fast markets and trading 
halts. The Book Indicator will alert brokers and the public that a 
trade could be executed at more than one price in that a part of the 
order could be executed at one price against the book and against the 
crowd pursuant to the Book Price Commitment Quantity, and the remaining 
part could be executed at another price (or prices) against the best 
market from the book or crowd. It is anticipated, however, that the 
eventual implementation of size parameters for disseminated options 
quotations will obviate the need for the Book Indicator.
    The following example illustrates the application of the proposed 
rule: the Book Price Commitment Quantity is set at 20 contracts; there 
are two sell orders resident in the book priced at 2\9/16\ and 2\5/8\ 
respectively--each for one contract; the crowd's Autoquote market is 
2\1/2\-2\3/4\; and the best bid/offer on the Exchange is 2\1/2\-2\9/16\ 
(assume no other market center has a better bid/offer). An incoming 
RAES market order to buy 50 contracts would be executed as follows:
     One contract will be executed at 2\9/16\ against the book;
     19 contracts will be executed at 2 \9/16\ against the RAES 
wheel;
     The new best bid/offer is 2\1/2\-2\5/8\ against the book;
     One contract will be executed at 2\5/8\ against the book;
     19 contracts will be executed at 2\5/8\ against the RAES 
wheel;
     The new best bid/offer is 2\1/2\-2\3/4\;
     The remaining 10 contracts will be executed against the 
RAES wheel at 2\3/4\.
    Currently, ABP has not yet been implemented for all option classes. 
SR-CBOE-00-03 amended CBOE Rule 6.8 Interpretation and Policy .04 to 
explicitly provide that there remains an obligation of the trading 
crowd, where ABP is not in place, to execute the first order rejected 
from RAES at the price of the booked order that caused the kickout. 
Thus, for those classes where ABP has not yet been implemented, the 
trading crowd must fill the first rejected order at the price of the 
booked order that created the kickout. This was done to ensure 
consistency with ABP requirements in those classes where ABP is in 
place. While the Exchange anticipates that ABP will be fully 
implemented for all option classes traded on the Exchange in the near 
future, the Exchange proposes to amend CBOE Rule 6.8 Interpretation and 
Policy .04 to provide that the first order rejected from RAES (because 
of a kickout based on a booked order) be filled against the book with 
any remainder being filled at the book price up to the Book Price 
Commitment Quantity established for that class, thus providing 
consistency with the proposed ABP rule.
    Lastly, CBOE proposes to amend Rule 6.8, Interpretation and Policy 
.04, to have the Interpretation apply in instances where ABP is not 
operational as a result of system constraints or pursuant to a fast 
market situation. The Exchange also proposes to amend some of the 
wording in paragraphs (a) and (b) of the proposed rule change to better 
clarify the application of split-price executions under the ABP system. 
According to the Exchange, these wording changes do not alter the 
intent or application of the proposed rule change.
2. Statutory Basis
    The CBOE believes the proposed rule change is consistent with and 
furthers the objectives of section 6(b)(5) \5\ of the Act in that it is 
designed to remove

[[Page 62779]]

impediments to a free and open market and to protect investors and the 
public interest.
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    \5\ 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

    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 
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 the CBOE. All 
submissions should refer to File No. SR-CBOE-00-21 and should be 
submitted by November 9, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-26804 Filed 10-18-00; 8:45 am]
BILLING CODE 8010-01-M