[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82423-82425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33125]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43746; File No. SR-CBOE-00-62]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated to Limit the 
Meaning of ``Public Customer'' for Purposes of Determining Who May Use 
RAES

December 19, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 28, 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.
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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 amend the provisions of CBOE Rule 6.8 
(RAES Operations) that govern the eligibility of the owners of certain 
types of accounts to submit orders through the Exchange's Retail 
Automatic Execution System (``RAES'').\3\ The text of the proposed rule 
change is set forth below. Deleted text is in brackets; new text is in 
italics.
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    \3\ RAES is the Exchange's automatic execution system for public 
customer market or marketable limit orders of less than a certain 
size.
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Rule 6.8 RAES Operations

    (a)(i) 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)), or member of a futures or 
securities exchange 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.
* * * * *

Interpretations and Policies

* * * * *
    .12 For purposes of this rule (or Rule 6.8(a)(i)), members, non-
member participants in a joint venture with a member, non-member broker 
dealers, and members of a futures or securities exchange are deemed to 
have an interest in accounts held by the following:
    1. Spouses of, or family members living in the same household with: 
CBOE members, non-member participants in a joint venture with a member, 
non-member broker dealers, or members of a futures or securities 
exchange.
    2. (a) An affiliate that holds a 5% or more interest in the CBOE 
member, non-member participant in a joint venture with a member, non-
member broker-dealer, or member of a futures or securities exchange; 
(b) Spouses of, or family members living in the same household with, 
any affiliate as defined in this rule.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. 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
    CBOE proposes to amend its rule governing the eligibility of the 
owners of certain types of accounts to submit orders through the 
Exchange's RAES system by: (i) interpreting the term

[[Page 82424]]

``interest,'' and (ii) providing that members of futures exchanges are 
not considered ``public customers'' for purposes of the rule.
    CBOE has stated that the RAES system provides a mechanism whereby 
public customers can receive automatic execution of their small market 
or marketable limit orders \4\ at the National Best Bid or Offer 
(``NBBO'').\5\ For the purposes of determining who is eligible to 
submit orders through RAES, Rule 6.8(a)(i) defines ``public customer 
orders'' as: 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.
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    \4\ Currently, RAES permits orders for up to 75 contracts (in 
all classes for which a greater maximum is not expressly provided 
for in the rules). Options subject to the 75-contract maximum 
include all classes of equity options and all classes of sector 
index options. Options on the S&P 500 Index, the Nasdaq 100 Index, 
the Dow Jones Industrial Average, and the High Yield Select Ten, as 
well as interest rate options, currently are subject to a 100-
contract limit.
    \5\ The Commission notes, however, that a consolidated NBBO does 
not currently exist for the options markets. Instead, each options 
exchange separately calculates the best bid or offer for reach 
multiply traded options class. See Securities Exchange Act Release 
No. 43086 (July 28, 2000), 65 FR 48023, 48024 n.22 (August 4, 2000).
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    Accordingly, any account in which a CBOE member or non-member 
participant in a joint venture with a CBOE member, or any non-member 
broker-dealer has an interest would not be deemed to be an eligible 
account for purposes of submitting RAES orders. A problem arises, 
however, in trying to determine what constitutes an ``interest.'' The 
Exchange has received numerous requests to provide interpretive advice 
with respect to whether certain individuals, who by nature of their 
relationship to persons who clearly are not public customers, are 
permitted to trade on RAES. For instance, there have been several 
inquiries as to whether the spouse or a relative of a CBOE member can 
trade for his or her own account through RAES. This proposal, 
therefore, aims to clarify the Exchange's position regarding the 
ability of several types of accounts to access RAES in order to receive 
automatic execution of their options orders.

Proposed Change

    First, CBOE proposes to amend Rule 6.8(a)(i) to prohibit members 
(or affiliates of members) of any futures exchange from trading on 
RAES.\6\ CBOE's rule currently prevents any broker-dealer (whether a 
member of CBOE or a non-member) from submitting trades through RAES 
because these entities clearly are not public customers. CBOE believes 
that a member of a futures exchange is the functional equivalent of a 
securities broker and, in many instances, may be affiliated with a 
broker-dealer. If there is an affiliate relationship, this proposal (as 
discussed below) would prohibit these affiliates from trading on RAES. 
In the instance, however, where a member of a futures exchange is not 
affiliated with a securities broker-dealer, the Exchange nevertheless 
believes it is reasonable to prohibit the futures exchange member from 
trading on RAES. The Exchange notes that there is a strong 
interrelationship between the futures and securities markets. Futures, 
futures options, and stock options overlie many of the same indices 
and, in fact, may be used to hedge each other or to exploit an 
arbitrage opportunity. Given the specialized knowledge of the member of 
the futures exchange, CBOE does not believe it would be reasonable to 
classify this entity as a ``public customer.'' For purposes of this 
rule, CBOE proposes to define ``affiliate'' as a person or entity that 
holds a 5 percent or more interest in the member of the futures 
exchange.
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    \6\ This proposal also excludes members of any securities 
exchange from trading on RAES. This exclusion is intended to apply 
specifically to those individuals or entities that have a securities 
exchange membership but who are not registered as broker-dealers.
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    Next, the Exchange proposes to add new Interpretation .12 \7\  to 
enumerate two categories of accounts in which CBOE members are deemed 
to have an interest.\8\ The first category addresses the status of 
relatives of CBOE members. The proposal would clarify that a CBOE 
member is deemed to have an interest in any account maintained by the 
spouse of, or family members living in the same household with, that 
CBOE member. The Exchange notes that this prohibition is designed to 
prevent a CBOE member from trading on RAES by opening an account for a 
family member and submitting orders through that account. This 
prohibition applies regardless of whether the account is jointly or 
individually titled or owned. In this instance, because the parties 
share the same household and are ostensibly one economic unit, it can 
reasonably be inferred that the proceeds from the trading account would 
inure to all individuals in the household. Furthermore, without this 
prohibition, it would be easy for a CBOE member to frustrate the 
purpose of the prohibition. For these reasons, the Exchange believes it 
is reasonable to impose a RAES-access trading restriction on relatives 
of CBOE members.
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    \7\ The text of the notice prepared by the Exchange 
inadvertently referred to the proposed interpretation here as 
Interpretation .11. If approved by the Commission, the proposed 
Interpretation would, in fact, become Interpretation .12. Telephone 
conversation between Steve Youhn, Attorney, CBOE, and Michael Gaw, 
Attorney-Adviser, Division of Market Regulation, Commission, on 
November 30, 2000.
    \8\ For simplification, the Exchange uses the term ``CBOE 
member'' to refer to CBOE members, non-member participants in a 
joint venture with a member, non-member broker dealers, and members 
of a futures or securities exchange.
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    The second category applies to affiliates of CBOE members. 
Specifically, CBOE members are deemed to have an interest in any 
account maintained by an affiliate of a CBOE member. The Exchange 
believes it is necessary to place a restriction on affiliates by virtue 
of their relationship to CBOE members. In many instances, the affiliate 
will be an entity that either owns, or is owned by, the CBOE member. 
Given the relationship of the two entities and the fact that one may 
exert control over the other, CBOE believes it is proper to impose a 
prohibition on RAES trading by the affiliate of the CBOE member. In 
other instances, the affiliate may be a business partner of the CBOE 
member. In these situations, the two parties will share a common 
economic bond with respect to the operation of their business venture. 
Accordingly, CBOE believes it is reasonable to prevent the affiliate 
from trading on RAES. If the affiliate is an individual, the Exchange 
notes that the prohibition against RAES trading also extends to spouses 
and/or family members living in the same household as the affiliate. 
For purposes of this rule, the exchange defines an affiliate as a 
person or entity that holds a 5 percent or more interest in the CBOE 
member, non-member participant in a joint venture with a member, non-
member broker-dealer, or member of a futures or securities exchange.
    CBOE has asserted that the rules of all of the floor-based options 
exchanges, which have been approved by the Commission, limit access to 
their automatic execution systems either to the accounts of public 
customers or to non-broker-dealer accounts.\9\ Given this limitation, 
the Exchange finds it necessary to provide interpretive guidance to 
clarify the types of accounts that it does not believe are eligible to 
submit orders through RAES. The clarifications provided in this 
proposed

[[Page 82425]]

rule change serve to ensure that RAES will continue to be for use by 
public customers for the automatic execution of their small market or 
marketable limit orders. The proposal also makes clear that certain 
other types of accounts will not be eligible to submit trades through 
RAES. The Exchange notes, however, that nothing would prevent the 
owners of these accounts from sending their orders to the floor for 
manual execution where they would receive firm quote treatment and 
execution at the NBBO.
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    \9\ See, e.g., PCX Rule 6.87(a) (only non-broker-dealer customer 
orders are eligible for execution on exchange's Automatic Execution 
System); Amex Rule 933(a) (same).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\10\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \11\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and in general to protect investors and the public 
interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement and Burden on Competition

    The CBOE does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulation 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 with 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 Exchange 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 filings will also be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to File No. SR-CBOE-00-62 and should 
be submitted by January 18, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 00-33125 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M