[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82418-82420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33119]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43745; File No. SR-CBOE-00-58]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to an 
Interim Intermarket Linkage

December 19, 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 November 15, 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 December 13, 2000, the Exchange 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\ In Amendment No. 1, the Exchange made technical changes to 
the proposed rule text and specified that the proposed interim 
intermarket linkage would be effective for a pilot period expiring 
on January 31, 2002. See letter from Timothy Thompson, Assistant 
General Counsel, Legal Department, CBOE, to Nancy Sanow, Assistant 
Director, Division of Market Regulation, Commission, dated December 
12, 2000 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to adopt a rule providing for the 
implementation of ``interim linkages'' with the other option exchanges. 
Below is the text of the proposed rule change. Additions are 
italicized.

CHAPTER VIII

Section B: Trading Crowds

Pilot Program for Away Market Maker Access

Rule 8.52

    (a) Definitions. For the purposes of this Rule, the terms below 
have the following definitions.
    (1) ``Corresponding Rule'' means a rule of a Participating 
Exchange that is substantially identical to this Rule 8.52.
    (2) ``Customer Size'' means the lesser of (i) the number of 
option contracts that the Participating Exchange sending the order 
guarantees it will automatically execute at its disseminated 
quotation in an Eligible Option Class for Public Customer Orders and 
(ii) the number of option contracts that the Participating Exchange 
receiving the order

[[Page 82419]]

guarantees it will automatically execute at its disseminated 
quotation in an Eligible Option Class for Public Customer Orders. 
This number shall be no fewer than 10.
    (3) ``Eligible Away Market Maker'' (``EAMM'') means, with 
respect to an Eligible Option Class, a market-maker, as that term is 
defined in Section 3(a)(22) of the Exchange Act, on a Participating 
Exchange:
    (A) is assigned to, and is providing two-sided quotations in the 
Eligible Option Class; and
    (B) that is participating in its market's automatic execution 
system in such Eligible Option Class.
    (4) ``Eligible Away Designated Primary Market-Maker'' 
(``EADPM'') means: with respect to the American Stock Exchange and 
the Philadelphia Stock Exchange, a Specialist in an Eligible Option 
Class; with respect to the International Securities Exchange, a 
Primary Market Maker in an Eligible Option Class; and with respect 
to the Pacific Exchange, a Lead Market Maker in an Eligible Option 
Class.
    (5) ``Eligible Option Class'' means all option series overlying 
a security, including both put and call options, which class is 
traded by the Exchange and at least one other Participating 
Exchange, to the extent that such Participating Exchanges have 
mutually agreed to include the option class in the Pilot Program.
    (6) ``Eligible Order'' means an order for the account of a 
Designated Primary Market Maker or an Eligible Away Market Maker 
that can be sent to a Participating Exchange marked as a Public 
Customer Order pursuant to provisions of paragraphs (b), (c), and 
(d) of this Rule.
    (7) ``Participating Exchange'' means (i) the Exchange and (ii) 
one or more of the American Stock Exchange, the International 
Securities Exchange, the Pacific Exchange, and the Philadelphia 
Stock Exchange, as the President of the Exchange, or his designee, 
has designated from time to time as having adopted a Corresponding 
Rule.
    (8) ``Pilot Program'' means the program established by this Rule 
and the Corresponding Rules of the other Participating Exchanges.
    (9) ``Principal Size'' means the number of option contracts that 
two or more Participating Exchanges mutually agree that they will 
automatically execute during the Pilot Program at their disseminated 
quotation for orders sent for the principal account of a market-
maker, and EAMM, or an EADPM that does not correspond to a 
Underlying Customer Order. This number shall be no fewer than 10.
    (10) ``Underlying Customer Order'' means an unexecuted Public 
Customer Order for which the Designated Primary Market Maker or 
EADPM is acting as agent and which underlies an Eligible Order.
    (b) Access to Other Participating Exchanges by Market Makers. 
Pursuant to the Pilot Program, a market-maker may send an order to 
another Participating Exchange for execution as a Public Customer 
only if the market-maker complies with the following conditions:
    (1) the order is an immediate-or-cancel order;
    (2) the price of the order is equal to the bid (offer) 
disseminated by the Participating Exchange at the time the market-
maker sends an order to sell (buy), and such bid (offer) is equal to 
the national best bid (offer) in that series of an Eligible Option 
Class, as calculated by the Exchange;
    (3) the Exchange's bid (offer) at the time market-maker sends 
the order to sell (buy) is not then equal to the national highest 
bid (offer) in that series of an Eligible Option Class, as 
calculated by the Exchange;
    (4) the order is no larger than the Principal Size; and
    (5) except with respect to orders a Designated Primary Market-
Maker is sending pursuant to paragraph (c) below, the market-maker 
has not received an execution of another such order in the same 
series of an Eligible Option Class on the same Participating 
Exchange pursuant to the Pilot Program in the previous one minute 
period.
    (c) Additional Access to Other Participating Exchanges by 
Designated Primary Market-Makers. In addition to the access to other 
Participating Exchanges provided in paragraph (b) above, a 
Designated Primary Market-Maker participating in the Pilot Program 
may send an order to another Participating Exchange for execution as 
a Public Customer if:
    (1) the Designated Primary Market-Makers complies with 
subparagraphs (1) through (3) of paragraph (b) above;
    (2) the order reflects the same terms as an Underlying Customer 
Order the Designated Primary Market-Maker is holding; and
    (3) the order is no larger than the Customer Size.
    (d) Access to the Exchange by Eligible Market-Makers on Other 
Participating Exchanges. Notwithstanding any other Rule of the 
Exchange, a Member may send to the Exchange for execution as a 
Public Customer Order an order for the account of an EAMM or an 
EADPM that complies with the Corresponding Rule of the EAMM's or 
EADPM's Participating Exchange.
    (e) Order Need Not Be in Writing. Notwithstanding the terms of 
Rule 6.24, an Eligible Order need not be in writing.
    (f) Implementation of the Pilot Program. The President, or his 
designee, may implement the Pilot Program, in whole or in part, with 
respect to specific Participating Exchanges, to the extent that any 
such Participating Exchange has agreed to implement corresponding 
aspects of the Pilot Program. Designated Primary Market-Maker 
participation in the Pilot Program shall be voluntary.
    (g) This Rule will be in effect on a pilot basis until January 
31, 2002.

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 this proposed rule change is to implement certain 
aspects of an intermarket options linkage on an ``interim'' basis.\4\ 
This interim linkage would utilize existing systems to facilitate the 
sending and receiving of order flow between CBOE market makers and 
their counterparts on the other option exchanges as an interim step 
towards development of a ``permanent'' linkage.
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    \4\ Under the proposal, the interim linkage would be for a pilot 
period expiring on January 31, 2002. See Amendment No. 1, supra note 
3.
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    The Commission has approved a linkage plan that now includes all 
five option exchanges.\5\ The option exchanges continue to work towards 
implementation of this linkage. However, because the implementation may 
take a significant amount of time, the option exchanges have discussed 
implementing an ``interim'' linkage. Such a linkage would use the 
existing market infrastructure to route orders between market-makers on 
the participating exchanges in a more efficient manner.
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    \5\ See Securities Exchange Act Release Nos. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000); 43573 (November 16, 2000), 65 
FR 70851 (November 28, 2000); and 43574 (November 16, 2000), 65 FR 
70850 (November 28, 2000).
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    The key component of the interim linkage would be for the 
participating exchanges to open their automated customer execution 
systems, on a limited basis, to market-maker orders. Specifically, 
market-makers would be able to designate certain orders as ``customer'' 
orders, and thus would receive automatic execution of those orders on 
participating exchanges.
    This proposed rule would authorize the CBOE to implement bilateral 
or multilateral interim arrangements with the other exchanges to 
provide for equal access between market makers on our respective 
exchanges. The Exchange currently anticipates that the initial 
arrangements would allow CBOE Designated Primary Market-Makers 
(``DPMs'') and their equivalents on the other exchanges, when they are 
holding customer orders, to effectively send those orders to the other 
market for execution when the other market has a better quote. Such 
orders would be limited in size to the lesser of the size

[[Page 82420]]

of the two markets' automatic execution size for customer orders. The 
Exchange expects that the interim linkage may expand to include limited 
access for pure principal orders, for orders of no more than 10 
contracts.
    All interim linkage orders must be ``immediate or cancel'' (that 
is, they cannot be placed on an exchange's limit order book), and a 
market-maker may send a linkage order only when the other (receiving) 
market is displaying the best national bid or offer and the sending 
market is displaying an inferior price. This will allow a market-maker 
to access the better price for its customer. In addition, if the 
interim linkage includes principal orders, it would allow market-makers 
to attempt to ``clear'' another market displaying a superior quote. Any 
exchange participating in the interim linkage will implement heightened 
surveillance procedures to help ensure that their market-makers send 
only properly-qualified orders through the linkage.
    DPM participation in the interim linkage will be voluntary. Only 
when a DPM and its equivalent on another exchange believe that this 
form of mutual access would be advantageous will the exchanges employ 
the interim linkage procedures. The CBOE believes that the interim 
linkage will benefit investors and will provide useful experience that 
will help the exchanges in implementing the full linkage.
2. Statutory Basis
    The proposed rule change meets the requirement of Section 6(b)(5) 
under the Act \6\ in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transaction in 
securities, to remove impediments to and perfect the mechanism for a 
free and open market and a national market system, and, in general, 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.

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 
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 also will be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to File No. SR-CBOE-00-58 and should 
be submitted by January 18, 2001.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33119 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M