[Federal Register Volume 66, Number 31 (Wednesday, February 14, 2001)]
[Notices]
[Pages 10332-10334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3683]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43932; File No. SR-CBOE-00-21]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change, and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 to Proposed Rule Change, by the Chicago Board Options 
Exchange, Inc. To Amend its Rule Governing the Operation of Its 
Automatic Book Priority System To Permit Split-Price Executions

DATE: February 6, 2001.

I. Introduction

    On May 24, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange''), filed with the Securities and Exchange Commission 
(``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 amend its rules governing the operation of its 
Retail Automatic Execution System (``RAES'') to provide for split-price 
executions under the Automatic Book Priority (``ABP'') system. On June 
22, 2000, CBOE filed Amendment No. 1 to the proposed rule change.\3\ 
The proposed rule change was published in the Federal Register on 
October 19, 2000.\4\ No comments were received on the proposal. On 
November 30, 2000, CBOE filed Amendment No. 2 to the proposed rule 
change.\5\ This order approves the proposed rule change, as amended. In 
addition, the Commission is publishing this notice to solicit comments 
on Amendment No. 2 to the proposed rule change, and is simultaneously 
approving Amendment No. 2 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, CBOE amended the text of the proposed 
rule change and included a discussion of the indicator to be used 
when a book order is establishing CBOE's best bid or offer. See 
letter from Angelo Evangelou, Attorney, CBOE, to Joseph Corcoran, 
Attorney, Division of Market Regulation, Commission, dated June 20, 
2000 (``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 43430 (October 11, 
2000), 65 FR 62776 (October 19, 2000) (``Notice'').
    \5\ In Amendment No. 2, CBOE amended the text of the proposed 
change to CBOE Rule 6.8, Interpretation and Policy .04, to 
correspond with the proposed changes to the remainder of the rule by 
obligating the trading crowd to execute orders rejected from RAES up 
to, and not in addition to, the Book Price Commitment Quantity. See 
letter from Angelo Evangelou, Attorney, CBOE, to Andrew Shipe, 
Attorney, Division of Market Regulation, Commission, dated November 
29, 2000 (``Amendment No. 2'').
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II. Description of the Proposed Rule Change

A. Text of the Proposed Rule Change

    The CBOE proposes to amend its rules governing the operation of its 
Retail Automatic Execution System (``RAES'') to provide for split-price 
executions under the ABP system. Below is the text of the proposed rule 
change. Proposed new language is italicized and proposed deletions are 
in [brackets].\6\
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    \6\ The text of the proposed rule change was previously 
published in the Notice. This publication of rule text corrects 
technical errors in the Notice relating to numbering, and reflects 
certain unrelated changes made to the CBOE Rule since the filing of 
the proposed rule change with the Commission. In addition, rule text 
has been revised to correct a typographical error in the original 
text. See telephone conversation between Angelo Evangelou, Attorney, 
CBOE, and Andrew Shipe, Attorney, Division of Market Regulation, 
Commission, January 8, 2001.
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* * * * *

Rule 6.8. RAES Operations

    This Rule governs RAES operations in all classes of options, except 
to the extent otherwise expressly provided in this or other Rules in 
respect of specified classes of options.
    (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)) 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.
    (ii) When RAES receives an order, the system automatically will 
attach to the order its execution price, determined by the prevailing 
market quote at the time of the order's entry to the system, except as 
otherwise provided in paragraph (b) of this Rule in instances where the 
best bid or offer on the Exchange's book constitutes the prevailing 
market best bid or offer, and as otherwise provided in Interpretation 
and Policy .02 under this Rule 6.8 in respect of multiply-traded 
options. A buy order will pay the offer, a sell order will sell at the 
bid. A Market-Maker logged on to participate in RAES (a ``Participating 
Market-maker'') will be designated as contra-broker on the trade. A 
trade executed on RAES at an erroneous quote should be treated as a 
trade reported at an erroneous price and adjusted to reflect the 
accurate market after receiving a Floor Official's approval.
    (b) When the best bid or offer on the Exchange's book constitutes 
the best bid or offer on the Exchange and is for a size less than the 
RAES order eligibility size for that class, such fact shall be

[[Page 10333]]

denoted in the Exchange's disseminated quote by a ``Book Indicator''. 
It is possible that the best bid or offer on the Exchange's book 
constitutes the prevailing market bid or offer [may be equal to the 
best bid or offer on the Exchange's book]. In those instances, a RAES 
order will be executed against the order in the book. In the event the 
order in the book is for a smaller number of contracts than the RAES 
order, the balance of the RAES order will be assigned to participating 
market-makers at the same price at which the initial portion [rest] of 
the order was executed up to an amount prescribed by the appropriate 
Floor Procedure Committee on a class-by-class basis (the ``Book Price 
Commitment Quantity''). Any remaining balance thereafter shall be (i) 
routed to the crowd PAR terminal if Autoquote is not in effect for that 
series; (ii) assigned to participating market-makers at the Autoquote 
price if Autoquote constitutes the new prevailing market bid or offer; 
or (iii) executed against any order in the book that constitutes the 
new prevailing market bid or offer with the balance of the RAES order 
being assigned to participating market-makers at that price up to the 
Book Price Commitment Quantity. Any additional remaining balance of a 
RAES order shall be handled in accordance with (ii) or (iii) of this 
paragraph.
    (c)-(g) Unchanged.
     * * * Interpretations and Policies:
    .01-.03 Unchanged.
    .04 In those option classes where the Automated Book Priority 
(``ABP'') system is not operational or has not yet been implemented, if 
a RAES order would be executed at the price of one or more booked 
orders, the order will be rerouted on ORS to either the DPM or to 
another location pursuant to the firm's routing parameters. Under 
ordinary circumstances, in those option classes where the Automated 
Book Priority system is not operational or has not yet been 
implemented, when one or more RAES eligible orders in a class of 
options is re-routed on ORS as described (but not in cases when the 
orders are routed to the firm's booth), the crowd will be obligated to 
sell (buy) the rerouted order (or the first order in any group of 
rerouted orders at the same price) up to the number of contracts 
represented by the booked order(s) and, in the event a balance remains 
on the rerouted order (or the first order in any group of rerouted 
orders at the same price) up to the Book Price Commitment Quantity (as 
defined in paragraph (b) of this Rule) where applicable, [equal to 
applicable maximum size of RAES eligible orders for that class of 
options] at the offer (bid) which existed at the time of the order's 
entry into the RAES system. Because the first such rerouted order will 
be entitled to a price that existed when the order was initially 
entered into the RAES system, it is imperative that such an order be 
represented by the floor brokers as quickly as possible. Orders re-
routed to the firm's booth and orders rerouted to the trading station 
that are not entitled to the above protection will be entitled to be 
filled by the trading crowd at the bid or offer existing when the Floor 
Broker represents the order in open outcry in the crowd, pursuant to 
Rule 8.51.
    .05-.08 Unchanged.
* * * * *

B. Description of the Proposed Rule Change

    Under current CBOE Rule 6.8, the ABP system allows an order entered 
into RAES to trade directly with an order on the Exchange's customer 
limit order book where the best bid or offer on the Exchange's book is 
equal to the prevailing market bid or offer. If any portion of the RAES 
order remains to be filled thereafter, the entire balance of the RAES 
order is assigned to participating market-makers at the price at which 
the initial portion of the order was executed against the book, 
regardless of the next prevailing best bid or offer on the Exchange. 
According to the Exchange, market-makers participating on RAES may find 
themselves holding positions at prices substantially different from 
those they quoted, and subject to unanticipated market risk.
    To address this situation, the Exchange proposes to modify Rule 6.8 
so that such RAES order balances would be executed against 
participating market-makers at the book price only up to an amount pre-
determined by the appropriate Floor Procedure Committee (``FPC'') for 
the subject option class. The pre-determined amount, to be called the 
``Book Commitment Quantity,'' would be set by the FPC from zero 
contracts up to the maximum RAES eligible order size for that option 
class. The Exchange anticipates that the FPC will mandate a generally 
uniform Book Price Commitment Quantity among option classes, which 
would become widely known to CBOE customers and other market 
participants. The Exchange also intends to issue a regulatory circular 
regarding Book Price Commitment Quantity parameters established by the 
FPC. The FPC would have to conduct a meeting to adjust the Book Price 
Commitment Quantity.\7\
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    \7\ See Amendment No. 1, supra.
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    If, after execution up to the Book Price Commitment Quantity, any 
portion of the RAES order is still unexecuted, that remaining balance 
would be: (i) Routed to the Public Automated Routing (``PAR'') system 
if Autoquote is not in effect for that series; (ii) assigned to 
participating market-makers at the Autoquote price if Autoquote 
represents the best bid or offer; or (iii) executed against an order in 
the book if such order equals or represents the best bid or offer, with 
any further balance of the RAES order again being assigned to 
participating market-makers at the new book price up to the Book Price 
Commitment Quantity. As long as an order in the book equals or 
represents the next best bid or offer (and Autoquote is in effect for 
the subject series), any remaining balance of a RAES order would be 
handled pursuant to (ii) or (iii) above.\8\
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    \8\ See Amendment No. 1, supra.
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    CBOE further proposes to affix a ``Book Indicator'' to its 
disseminated quotation when an order in the book represents the best 
bid or offer on the Exchange. This indicator will alert brokers and the 
public that the bid, offer, or both are being generated by orders in 
the book, not by market maker quotes,\9\ However, the indicator would 
not be disseminated if the booked order is for a size greater than the 
RAES order eligibility size because a split-price execution would not 
occur in such instance.
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    \9\ The indicator would be a ``B'' if the bid on the book is 
better than the trading crowd bid; ``O'' if the book offer is better 
than the trading crowd offer; and ``C'' if both were better than the 
trading crowd bid and offer. This indicator would be disseminated in 
the ``Special Market Conditions'' field that also includes 
indicators for, among other things, fast markets and trading halts. 
See Amendment No. 1, Supra.
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    Where ABP is not in place, CBOE Rule 6.8, Interpretation and Policy 
.04 currently provides that the trading crowd is obligated to execute 
the first order rejected from RAES at the price of the booked order 
that caused the rejection, or ``kickout''. The Exchange now proposes, 
in order to provide consistency with the proposed ABP rule, to amend 
Interpretation and Policy .04 to provide that the first order rejected 
from RAES (because of a kickout based on a booked order) be filled 
against the book, with any remainder thereafter being executed by the 
crowd at the book price up to the Book Price Commitment Quantity. 
Finally, CBOE proposes to amend Interpretation and Policy .04 to apply 
in

[[Page 10334]]

all instances where ABP is not operational.

III. 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.\10\ In particular, the Commission believes that the proposal 
is 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, to remove impediments 
to and perfect the mechanism of a free and open market, and to protect 
investors and the public interest.
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    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiently, competition, and capital 
formation. 15 U.S.C. 78(c)(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, in those options classes where ABP is in place, 
if an incoming RAES order is larger than the booked order establishing 
the Exchange's best price, the RAES order would be executed against the 
booked order. The remainder of the RAES order no longer would be 
executed in its entirety at the book price against market-makers 
participating on RAES. Rather, only the amount of that order up to the 
Book Price Commitment Quantity would be executed in this manner. 
Thereafter, if any portion of the RAES order remains unfilled, the 
balance of the order will be executed at the next prevailing bid or 
offer, i.e., the book price or the Autoquote price. If the Autoquote 
system is not in effect, the remainder of the RAES order would be 
routed to the crowd PAR terminal for execution, whether against the 
book or competing members of the trading crowd.
    The Commission notes that the proposed rule change would continue 
to permit limit orders in the Exchange's book to trade against RAES 
orders. RAES orders, on the other hand, would be permitted to trade 
against orders in the book up to the applicable book size, and 
thereafter up to the new Book Price Commitment Quantity at the book 
price, with market-makers participating on RAES taking the opposite 
side of such transactions. Any portion of the RAES order remaining 
thereafter would be executed at the best price available, whether from 
the book, Autoquote, or the trading crowd. In addition, CBOE will 
attach a ``Book Indicator'' to its disseminated quote to indicate to 
persons entering orders on RAES that their orders may be subject to a 
split-price execution. Therefore, firms sending orders to RAES should 
have notice that the displayed quote may not be good for the full RAES-
eligible size, and instead would be executed at the prevailing quote up 
to the Book Price Commitment Quantity only. The Commission finds that 
these procedures are consistent with the Act.
    The Commission further finds that the proposed revisions to 
Interpretation .04 of Rule 6.8 are proper. These changes are meant to 
parallel the above-described modifications to the ABP system in options 
classes where ABP has not been implemented. The Commission further 
believes that the CBOE's proposal to extend the application of 
Interpretation and Policy .04 to situations where ABP is not 
operational, such as in the case of a fast market or an operational 
failure, is also proper. The procedures to be employed, as outlined 
above, would thus be applied to all classes of options, whether ABP is 
in effect or not, thereby promoting uniformity of execution procedures 
in all classes of options.
    Finally, the Commission finds good cause for approving Amendment 
No. 2 prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. In Amendment No. 2, the CBOE 
merely clarified the text of the proposed change to Interpretation and 
Policy .04, to reflect that where ABP is not in operation, the trading 
crowd is required to execute re-routed orders at the book price up to, 
and not in addition to, the Book Price Commitment Quantity. This 
confirms the Interpretation to the revised rule text. Therefore, the 
amendment did not substantively alter the proposal.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
is consistent with the Act. Persons making written submissions should 
be 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-00-21 and should be 
submitted by March 7, 2001.

V. Conclusion

    For the foregoing reasons, the Commission finds that CBOE's 
proposal to amend its rules governing the operation of its RAES system 
to provide for split-price executions under the Automatic Book Priority 
System, as amended, is consistent with the requirements of the Act and 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-00-21), as amended, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3683 Filed 2-13-01; 8:45 am]
BILLING CODE 8010-01-M