[Federal Register Volume 66, Number 6 (Tuesday, January 9, 2001)]
[Notices]
[Pages 1706-1708]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-540]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43789; File No. SR-CBOE-00-41]


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 Firm Quote Rule To Permit Split-Price 
Executions

January 2, 2001.
    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 18, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') field with the Securities and Exchange Commission 
(``Commission'') the proposed new rule 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 its rule governing the operation of 
its Firm Quote Rule to permit split-price executions. Below is the text 
of the proposed rule change. Proposed new language is italicized, and 
proposed deletions are in brackets.
* * * * *

Rule 8.51  Trading Crowd Firm Disseminated Market Quotes

    (a) The classes and series which shall be subject to the 
requirements of this rule will be determined at the discretion of the 
appropriate Market Performance Committee (``MPC'').
    (1) Only non-broker dealer customer orders shall be entitled to an 
execution pursuant to the provisions of this paragraph (a). For the 
purposes of this Rule, the term broker-dealer includes foreign broker-
dealers as defined in Rule 1.1(xx).
    (2) The firm quote requirement shall be no less than the RAES 
contract limit applicable to that class of options. However, the 
appropriate Floor Procedure committee, in its discretion, may establish 
a different firm quote requirement for a particular class of options 
that is no less than the RAES contract limit and no more than 50 
contracts. For classes or series that are not traded on RAES, the 
appropriate Floor Procedure Committee may establish a firm quote 
requirement of between 10 and 50 contracts. The firm quote requirement 
applies at all times other than during rotation, unless there is a 
contrary Floor Official ruling pursuant to subparagraph (3) of this 
paragraph (a). Except as provided in sub-paragraph (3) below with 
respect to the price at which an order must be executed, the firm quote 
requirement obligates a trading crowd to sell (buy) at lease the 
established number of contracts at the offer (bid) which is displayed 
when a buy (sell) order reaches the trading station where the 
particular option class is located for trading. The Exchange may 
establish a higher firm quote requirement, of up to 100 contracts, for 
the trading crowd for options on the Dow Jones Industrial Average. 
Except in the case of rerouted RAES orders that are eligible for the 
RAES kickout price in accordance with Interpretation .04 to Rule 6.8, 
an order ordinarily will be deemed to reach the trading station when a 
Floor Broker represents the order in open outcry at the trading 
station.
    (3)(A) It is possible that the prevailing market bid or offer may 
be equal to the best bid or offer on the Exchange's book. In those 
instances, and in the event the order in the book is for a smaller 
number of contracts than the represented order, the balance of the 
represented order must be executed at no worse than the same price at 
which the initial portion of the order was executed up to an amount 
prescribed by the appropriate Market Performance Committee on a class-
by-class basis (the ``Book Price Commitment Quantity'') Any portion of 
the order remaining to be executed after the trading crowd has executed 
the Book Price Commitment Quantity at the disseminated best bid or 
offer will be required to be executed at least at (i) the price of any 
other order(s) in the book that then constitutes the new prevailing 
market bid or offer for the quantity of such order(s); or (ii) the 
market-maker disseminated price if that price constitutes the new 
prevailing market bid or offer (after the booked order(s) has been 
traded) for the entire remainder of the order. So long as an order in 
the book constitutes the new prevailing market bid or offer, any 
remaining balance of the order will be handled in accordance with (i) 
or (ii) of this paragraph, in such order.
    (B) The market-maker disseminated price is the displayed price 
which reflects either the price established by (1) the Exchange's 
Autoquote system; (2) another quoting system operated by a trading 
crowd market-maker, including the Designated Primary Market-Maker; or 
(3) a verbalized quote by a member of the trading crowd.
    (C) Generally, the Book Price Commitment Quantity for a particular 
option class will be equal to the Book Price Commitment Quantity 
established pursuant to paragraph (b) of Rule 6.8. However, the 
appropriate Market Performance Committee may determine to establish a 
different Book Price Commitment Quantity for any particular option 
class.
    [(3)] (4) When orders for the same class (whether for the same 
series or different series) from the same beneficial owner are 
represented at the trading station at approximately the same time, then 
only the first of such orders that cumulatively equal or add up to less 
than the firm quote requirement shall be entitled to an execution 
pursuant to paragraph (a)(2) above.
    [(4)] (5) On a case by case basis, any two Floor Officials may 
grant exemptions to or suspend the provisions of this paragraph (a) for 
either a class or series within a class if, in their determination, to 
do so is in the interest of a fair and orderly market. Additionally, 
any two Floor Officials may determine that an exemption to Rule 8.51(a) 
is warranted, on a case by case basis, upon their determination that an 
obvious error occurred in the posting of the disseminated market quote.
    [(5)] (6) The senior person then in charge of the Exchange's 
Control Room shall have the authority to suspend the firm quote 
requirements of this paragraph (a) with respect to a class of options 
if a system malfunction or other circumstance impairs the Exchange's 
ability to disseminate or update market quotes in a timely and accurate 
manner. After exercising such authority, that senior person shall 
immediately seek approval by two Floor Officials, who may confirm or 
overrule the decision. If this authority is invoked, the Exchange's 
Control Room will disseminate a message notifying the public that the 
displayed quotes are not firm because of a data dissemination problem. 
Once the problem has been corrected and the market quotes have been 
updated, the suspension of the firm quote requirements of paragraph 
(a), shall be lifted by either the senior person then in charge of the 
Exchange's Control Room, or by two Floor Officials.
    (b) With respect to orders (or portions of orders) at the displayed 
offer (bid), that are not entitled to an execution pursuant to the 
provisions of paragraph (a), the trading crowd is required to either.

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    (1) sell (buy) the number of contracts specified in the order 
pursuant to the rules of execution described in paragraph (a) (2) and 
(3); or
    (2) change the displayed offer (bid) to reflect that the previously 
displayed offer (bid) is no longer available.

* * *Interpretations and Policies

    .01 With respect to subsection (a) of this Rule, if the 
disseminated bid (offer) is on behalf of an order represented by a 
Floor Broker, DPM, or OBO and is for less than the firm quote 
requirement applicable for that class of options, the trading crowd is 
obligated to buy or sell the necessary number of contracts needed to 
make the disseminated quote firm for the firm quote requirement for 
that class of options.
    .02-.08 No change.

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

    In its filing with the Commission, the Exchange 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 Exchange 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
    a. Background. The Exchange recently filed a proposed rule change 
that provides that, under certain circumstances, an order that is 
routed to the Exchange's Retail Automatic Execution System (``RAES'') 
may be executed at more than one price.\3\ Specifically, the Exchange 
proposed that RAES orders utilizing the Exchange's Automated Book 
Priority (``ABP'') system 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.\4\ The balance would be (i) routed to the Public Access Routing 
terminal (``PAR'') if Autoquote is not in effect for that series; (ii) 
assigned to participating market-makers at the Autoquote price if 
Autoquote constitutes the new best bid or offer; or (iii) executed 
against an order in the book if such order constitutes the new 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.
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    \3\ See Securities Exchange Act Release No. 43430 (October 11, 
2000), 65 FR 62776 (October 19, 2000) (SR-CBOE-00-21).
    \4\ That pre-determined contract amount, to be called the ``Book 
Price Commitment Quantity,'' would be determined by the FPC, and 
could set from zero contracts up to the maximum RAES eligible order 
size for that option class. Thus, if the book contains an order for 
one 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 one contract and 
execute against the trading crowd for 39 contracts on RAES at the 
book price.
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    b. Proposed Change. RAES essentially provides an automated version 
of the firm quote process and the same logic which suggests there 
should be split price executions on RAES in certain circumstances 
applies equally to the firm quote process for orders represented in 
open outcry. Consequently, the Exchange is now proposing to make a 
similar change to the Firm Quote Rule.
    Specifically, in those instances where the Exchange's book 
constitutes the prevailing market bid (offer) and a marketable sell 
(buy) order is represented in open outcry, the represented order would 
be executed at the book price in an amount equal to the amount of the 
booked order establishing the best bid (offer). However, in the event 
the order in the book is for a smaller number of contracts than the 
represented order, the balance of the represented order must be 
executed at no worse than the same price at which the initial portion 
of the order was executed up to an amount prescribed by the appropriate 
Market Performance Committee on a class-by-class basis (the ``Book 
Price Commitment Quantity''). Any portion of the order remaining to be 
executed after the trading crowd has executed the Book Price Commitment 
Quantity at the disseminated best bid or offer will be required to be 
executed at least at (i) the price of any other order(s) in the book 
that then equals or represents the prevailing market bid or offer for 
the quantity of such order; or (ii) the market-maker disseminated price 
\5\ if that price represents the prevailing market bid or offer (after 
the booked order(s) has been traded) for the entire remainder of the 
order. So long as an order in the book equals or represents the next 
prevailing market bid or offer, any remaining balance of the order will 
be handled in accordance with (i) or (ii) of this paragraph, in such 
order.
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    \5\ The market-maker disseminated price is the displayed price 
which reflects either the price established by (1) the Exchange's 
Autoquote system; (2) another quoting system operated by a trading 
crowd market-maker, including the Designated Primary Market-Maker; 
or (3) a verbalized quote by a member of the trading crowd.
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    The following example illustrates the application of the proposed 
rule: The Book Price Commitment Quantity is set at 10 contracts; there 
ae two sell orders resident in the book priced a 2\9/16\ and 2\5/8\ 
respectively--the first is for one contract and the second is for 5 
contracts; 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); A market order to buy 50 contracts is 
represented in the trading crowd. The crowd's obligation with respect 
to this order would be as follows:
     Ten contracts must be executed at no worse than 2\9/16\;
     The new best bid/offer is 2\1/2\-2\5/8\;
     Ten contracts must be executed at no worse than 2\5/8\;
     The new best bid/offer is 2\1/2\-2\3/4\;
     The remaining 30 contracts must be executed at no worse 
than 3\3/4\.
    c. Book Indicator. When the best bid or offer on the Exchange's 
book constitutes the best bid or offer on the Exchange (i.e., it is 
establishing the best bid or offer and not merely matching the market-
maker bid or offer) 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.''
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \6\ in general, and in particular, with Section 
6(b)(5) of the Act,\7\ in that it is designed to promote just and 
equitable principles of trade, prevent fraudulent and manipulative acts 
and practices.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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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 publishers 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 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-00-41 and should 
be submitted by January 30, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(A)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-540 Filed 1-8-01; 8:45 am]
BILLING CODE 8010-01-M