[Federal Register Volume 66, Number 25 (Tuesday, February 6, 2001)]
[Notices]
[Pages 9113-9115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3042]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43908; File No. SR-CBOE-00-53]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Permanent Approval of Live Ammo to RAES

January 30, 2001.

I. Introduction

    On November 8, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt the rule governing the 
execution of orders on the live ammo screen on a permanent basis. On 
December 11, 2000, the proposal was published in the Federal 
Register.\3\ The Commission did not receive any comments on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43646 (November 30, 
2000), 65 FR 77403.
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II. Background

    The CBOE originally proposed to amend its Rule 7.4, which governs 
the execution of orders by order book officials (``OBOs'') or 
designated primary market makers' (``DPMs'') book staff, to permit the 
electronic execution of certain orders on the live ammo screen, in June 
1998 (``Original Proposal'').\4\ The Commission approved the Original 
Proposal on a pilot basis on

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February 2, 2000,\5\ which was scheduled to expire on October 30, 2000. 
On October 26, 2000, the CBOE submitted a proposed rule change, 
pursuant to Section 19(b)(3)(A) of the Act,\6\ to extend the pilot 
until December 15, 2000.\7\ On December 7, 2000, the CBOE submitted a 
proposed rule change, pursuant to Section 19(b)(3)(A) of the Act,\8\ to 
extend the pilot until January 31, 2001.\9\
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    \4\ Securities Exchange Act Release No. 40283 (July 30, 1998), 
63 FR 42085 (August 6, 1998).
    \5\ Securities Exchange Act Release No. 42379, 65 FR 6665 
(February 10, 2000) (``Original Order'').
    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ Securities Exchange Act Release No. 43499 (October 31, 
2000), 65 FR 67023 (November 8, 2000).
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ Securities Exchange Act Release No. 43727 (December 14, 
2000), 65 FR 80968 (December 22, 2000).
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    In addition, on July 14, 2000, the CBOE submitted a related 
proposed rule change, pursuant to Section 19(b)(3)(A) of the Act,\10\ 
to implement a systems change to its Order Routing System (``ORS'') to 
provide for the automatic rerouting of cancel replace orders.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ Securities Exchange Act Release No. 43185 (August 21, 
2000), 65 FR 51884 (August 25, 2000) (``ORES Modification''). The 
ORS Modification will permit the processing of a cancel replace 
order for an order residing on the EBook by routing the replace 
order through the ORS as a new order, after the cancel portion has 
been completed. The replace order, as with any new incoming order, 
may be eligible for execution in the Retail Automatic Execution 
system (``RAES''), crossing with other EBook orders through the 
Automated Book Priority system, routing directly to the EBook 
(automatically updating the quote if it improves the market), or 
routing to the Public Automated Routing (``PAR'') terminal or Booth 
Automated Routing terminal for price improvement. According to the 
Exchange, the ORS Modification was implemented on January 24, 2001. 
Telephone call between Jamie Galvin, CBOE and Kelly Riley, Division 
of Market Regulation, SEC, on January 30, 2001.
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III. Description of the Proposal

    The live ammo screen, which is an undisplayed portion of the CBOE's 
electronic customer limit order book, known as the Electronic Book or 
EBook, receives for further processing orders that are market orders or 
limit orders that improve the market. An order may be routed to the 
live ammo screen under a number of circumstances. First, market orders 
that are received through the Exchange's order shoe \12\ that are 
manually booked are automatically routed to the live ammo screen. 
Second, limit orders that better the quote that are received through 
the order shoe and that are manually booked are automatically routed to 
the live ammo screen. Third, limit orders that better the quote and 
that are routed directly to the EBook when the routing parameters have 
been set at ``0'' are automatically sent to the live ammo screen.\13\ 
Finally, marketable limit orders that are electronically booked from a 
floor broker's PAR workstation are automatically routed to the live 
ammo screen.\14\
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    \12\ The order shoe is where orders are manually held, i.e. 
where paper order tickets are actually placed at the trading post.
    \13\ The ``0'' parameter is an order routing parameter that may 
be implemented under high volume situations to route all limit 
orders to the EBook.
    \14\ At the time of the Original Proposal, approximately 90 
percent of orders routed to the live ammo screen were cancel replace 
orders. According to the CBOE, the ORS Modification should 
significantly reduce the amount of orders routed to the live ammo 
screen. See note 11, supra.
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    The Original Proposal, which CBOE proposes to implement on a 
permanent basis, permits OBOs or DPMs, as the case may be, to designate 
certain orders on the live ammo screen to be electronically executed 
against market makers standing in the crowd, i.e., the live ammo to 
RAES feature of the live ammo screen.\15\ The live ammo to RAES feature 
of the live ammo screen permits an OBO (or DPM) to send RAES-eligible 
orders on the live ammo screen to RAES for automatic execution.\16\ The 
OBO (or DPM) may select all or any portion of the orders displayed on 
the live ammo page to be routed to RAES.\17\ Selected RAES-eligible 
orders are routed based on time priority, pursuant to CBOE Rule 6.45. 
Orders that are not RAES-eligible must be manually represented in the 
crowd by the OBO (or DPM) or sent to the EBook, if book eligible.\18\
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    \15\ Prior to the Original Proposal, an OBO or DPM, acting in 
his or her capacity as an OBO, represented in the trading crowd each 
order that resided on the live ammo screen.
    \16\ Orders selected for automatic execution must satisfy RAES 
requirements. Currently, RAES accepts market and marketable limit 
orders that meet the applicable size requirements.
    \17\ A live ammo screen page may contain up to sixteen orders.
    \18\ A ``book all'' button permits the OBO (or DPM) to send all 
book eligible orders on the live ammo screen to the EBook.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\20\ which provides, among other things, that the rules of an 
exchange be designed to promote just and equitable principals of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, and processing information with respect 
to, and facilitating transactions in securities, and to remove 
impediments to and perfect the mechanism of a free and open market, and 
in general to protect investors and the public interest.
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    \19\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission continues to believe that the live ammo to RAES 
feature should help in providing timely executions of orders on the 
live ammo screens of the CBOE's EBook. In absence of this feature, an 
OBO (or DPM) will be again required to manually represent each order on 
the live ammo screen in the crowd. As discussed in the Original Order, 
during periods of high volume or volatility, the OBO (or DPM) may be 
unable to manually represent these live ammo orders in a timely 
fashion, which could result in investors' orders receiving inferior 
executions.\21\ The live ammo to RAES feature enables an OBO (or DPM) 
to address live ammo orders and provide for their execution faster than 
would occur if each order had to be individually represented in the 
crowd by the OBO (or DPM). Thus, the Commission believes that it is in 
the public interest for the live ammo to RAES feature to be implemented 
on a permanent basis.
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    \21\ See note 5, supra. In the Original Order, the Commission 
also noted that delayed execution of customer orders may implicate a 
broker-dealer's best execution responsibilities. See letter from 
Arthur Levitt, Chairman, SEC, to Michael Kelly, President, First 
Options of Chicago, Inc., dated April 13, 1999.
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    In the Original Order, the Commission expressed concern that the 
use of the live ammo screen may disadvantage customer orders. 
Specifically, the Commission stated that it expected the Exchange to 
make systems enhancements to ensure that a maximum number of customer 
orders in the CBOE system are matched against each other. The 
Commission continues to encourage the CBOE to develop systems 
enhancements to ensure that a maximum number of customer orders in the 
CBOE system are matched against one another. However, the Commission 
believes that, in the meantime, the live ammo to RAES feature should 
provide investors with enhanced executions and should be implemented on 
a permanent basis.
    In addition, the Commission directed the Exchange to develop 
systems enhancements to ensure that when there are no opportunities for 
the matching of customer orders in the CBOE-system, RAES-eligible 
orders will be routed directly to RAES without the interim step of 
appearing first on the live ammo screen. In response to this directive, 
the Exchange proposed the ORS Modification, which will permit cancel

[[Page 9115]]

replace orders to be rerouted through the ORS without having to be sent 
to the live ammo screen. The Commission notes that, according to the 
Exchange, the majority of orders that were sent to the live ammo screen 
were cancel replace orders. Therefore, the Commission is encouraged by 
the new ORS Modification and its impact on the ability of customer 
orders to be routed directly through the ORS without having the interim 
step of first going to the live ammo screen. That having been said, 
however, the Commission urges the Exchange to continue to consider 
other systems modifications to address those orders that continue to be 
routed to the live ammo screen.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-CBOE-00-53) is approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3042 Filed 2-5-01; 8:45 am]
BILLING CODE 8010-01-M