[Federal Register Volume 65, Number 205 (Monday, October 23, 2000)]
[Notices]
[Pages 63272-63273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27133]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43448; File No. SR-CBOE-00-35]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to Manual Handling of RAES Orders 
in Certain Limited Situations

October 17, 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 9, 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 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons and to approve the 
extension of a pilot program through February 21, 2001.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 C.F.R. 240.19b-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 amend Exchange Rule 6.8(c) in order to extend, 
for an additional six-month period, the pilot program that currently 
provides for certain orders to be rejected from RAES for manual 
handling under certain limited conditions (``Pilot''). 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

1. Purpose
    The purpose of the proposed rule change is to extend the Pilot for 
an additional six-month period. The Pilot provides that orders be 
rejected from RAES in the limited situation when an Autoquote-generated 
bid or offer for a particular series of options has become locked or 
crossed with the Exchange's best bid or offer as established by a 
booked order.\3\ The Exchange is requesting an extension of the Pilot 
\4\ so that RAES kick-out procedures may continue in effect while the 
Commission is considering the approval of two proposed rule changes. 
The Exchange represents that these proposed rule changes, currently 
pending before the Commission, were developed to obviate the need for 
RAES kick-outs under the circumstances covered by the Pilot.
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    \3\ Securities Exchange Act Release No. 42168 (November 22, 
1999), 64 FR 66952 (November 30, 1999) (notice of rule proposal 
filing and accelerated approval of order establishing Pilot) 
(``Original Notice''); Securities Exchange Act Release No. 42615 
(April 3, 2000), 65 FR 19401 (April 11, 2000) (notice of rule 
proposal filing and accelerated approval of order granting extension 
of Pilot) (``First Extension Notice'').
    \4\ The Pilot was due to expire on August 21, 2000.
    \5\ First Extension Notice at 65 FR 19403.
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    In the first extension of the Pilot,\5\ the CBOE stated that the 
Exchange would continue to seek other alternatives to having RAES 
orders rejected in the limited situation where quotations generated by 
the Autoquote system become locked or crossed with a booked order.\6\ 
During the 6-month period of the first extension of the Pilot, CBOE 
developed two systems changes which the Exchange represents would, if 
implemented, virtually eliminate RAES kick-outs under the Pilot. The 
systems changes are the subject of the two proposed rule changes 
currently pending at the Commission.
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    \6\ Id.
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    The first systems change is an enhancement to the Automated Book 
Priority System (``ABP''), called ABP Split Price, that would allow 
incoming RAES orders utilizing ABP to be executed against the book 
price up to the applicable book volume, or a larger amount as 
predetermined by the appropriate Floor Procedure Committee, for the 
subject option class.\7\ The balance of these orders would trade at the 
next best available price, whether: (1) Against another booked order; 
or (2) against market-makers logged onto RAES. If traded against market 
makers, the balance of such orders would trade at the best market-maker 
quote, whether generated by Autoquote or verbalized by a market maker.
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    \7\ See SR-CBOE-00-21. The proposed rule change was published 
for public comment in Securities Exchange Act Release No. 34-43430 
(October 11, 2000).
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    The second systems change for which the CBOE has sought approval is 
called Autoquote Triggered EBook Execution (``Trigger'').\8\ Trigger is 
an enhancement to the electronic limit order book (``EBook'') that 
would allow certain booked orders to be automatically executed up to 
the RAES contract limit applicable to the particular series of options. 
Trigger would become operative in the limited situation where the bid 
or offer generated by Autoquote (or any Exchange-approved proprietary 
quote generation system) for a particular options series locks or 
crosses the Exchange's best bid or offer for that series as established 
by a booked order. By providing for automatic execution of these booked 
orders, Trigger would eliminate the vast majority of RAES kick-outs 
which result when firms seeking out pricing anomalies detect a skewed 
quote and submit a RAES eligible order or orders to trade at the book 
price.
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    \8\ See SR-CBOE-00-22.
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2. Statutory Basis
    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of the Act \9\ in that it is designed to 
remove impediments to a free and open market and to protect investors 
and the public interest.
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    \9\ 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 
a 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 63273]]

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, 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-00-35 and should be 
submitted by November 13, 2000.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    After careful review, the Commission finds that the proposal is 
consistent with Section 6 of the Act.\10\ In particular, the Commission 
finds the proposal consistent with Section 6(b)(5) of the Act,\11\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that it is in the public interest to encourage 
the Exchange to expand its implementation of ABP. The broader the 
implementation of ABP, the more likely customer limit orders will, 
where appropriate, be given priority over other interest on the 
Exchange. On the other hand, implementation of ABP may also expose 
market makers to an unfair risk of financial loss where the market in 
an underlying stock moves significantly and quickly in a direction that 
makes a price established by a booked order substantially better than 
the price calculated by CBOE's Autoquote formula.\12\ The Commission 
approves this extension of the Pilot in order to permit the mitigation 
of these risks while encouraging the Exchange to more broadly implement 
ABP. At the same time, this extension will provide the Commission an 
opportunity to evaluate, while the Pilot is still in effect, the 
Trigger and ABP Split price proposals designed to reduce the number of 
RAES rejects pursuant to the Pilot.
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    \12\ Original Notice at 63 FR 66952.
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    Finally, the Commission plans to evaluate the continued impact of 
the Pilot on ABP executions, as well as the impact of any related rule 
proposals approved and implemented during the Pilot, based on 
statistical data provided by the Exchange. Accordingly, the Commission 
finds good cause for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-00-35) is hereby 
approved through February 21, 2001.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-27133 Filed 10-20-00; 8:45 am]
BILLING CODE 8010-01-M