[Federal Register Volume 66, Number 104 (Wednesday, May 30, 2001)]
[Notices]
[Pages 29371-29372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13532]



[[Page 29371]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44339; File No. SR-CBOE-2001-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated Relating to the Proposed Order ``PACER''

May 22, 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 April 2, 2001, the Chicago Board Options Exchange, Incorporated 
(``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 April 20, 2001, the CBOE submitted to the Commission 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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 CBOE described the circumstances in 
which a Designated Primary Market Maker (``DPM'') may disengage and 
reactivate PACER. In addition, Amendment No. 1 also made technical 
corrections to the language of the proposed rule change. See letter 
from Stephen M. Youhn, Attorney, CBOE, to Gordon Fuller, Counsel to 
the Assistant Director, Division of Market Regulation, SEC, dated 
April 19, 2001. Amendment No. 1 is discussed in more detail in 
Section II.A. below.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend its rules to add a new parameter, the 
order PACER, to its Order Routing System (``ORS''). PACER will enable 
the CBOE to modulate the frequency of executions through the Exchange's 
Retail Automatic Execution System (``RAES''). Below is the text of the 
proposed rule change, as amended by Amendment No. 1. Proposed new 
language is italicized.

Rule 6.8: RAES Operations

    (d)(vi)
    The appropriate Floor Procedure Committee (``FPC'') may regulate 
the frequency of executions through RAES. To regulate the frequency, 
the FPC may institute a ``PACER interval'' applicable to a member 
firm's RAES orders on the same side of the market within a given 
class of options. The PACER interval, which shall be activated by an 
initial RAES execution, shall prohibit subsequent RAES executions by 
the same member firm on the same side of the market within the same 
class until a set amount of time (the PACER interval) expires. Upon 
expiration of the PACER interval, that member firm would again be 
entitled to receive RAES executions in that class, subject to 
subsequent PACER restrictions. The appropriate FPC shall determine 
the length of the PACER interval. RAES-eligible orders received 
during the PACER interval shall be routed to PAR. The PACER interval 
shall not be applicable to orders that execute against EBOOK.
    When there is a large influx of orders that route from RAES that 
are rerouted for manual handling such that there are more orders 
than can be handled expeditiously, the DPM for the class, with input 
from the trading crowd, shall have the ability to disengage the 
order PACER for that class. When the influx of orders subsides such 
that orders may be handled expeditiously, the DPM in the affected 
class, upon receipt of approval by two Floor Officials, may 
reactivate PACER in the affected class.
    For purposes of this rule, long (short) calls and short (long) 
puts shall be considered to be on the same side of the market.

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 Exchange proposes to amend CBOE Rule 6.8(d) to enable the 
appropriate Floor Procedure Committee (``FPC'') to limit the frequency 
with which member firms can receive executions through RAES. Under the 
proposal, CBOE will add a new parameter, the order PACER, that will 
enable it to modulate the frequency of executions through RAES. The 
CBOE represents that the proposal is designed to permit customers to 
continue to receive the benefits of automatic execution of their small 
option orders while at the same time allowing market makers to limit 
their exposure to artificial depth.
    When PACER is engaged, individual member firms will be entitled to 
execute, in a particular class, one RAES order (regardless of series) 
on the same side of the market every designated number of seconds. The 
appropriate FPC shall determine and establish the length of time for 
the PACER interval setting on a class-by-class basis.\4\ If the PACER 
interval is established at five seconds, each individual member firm 
would be entitled to receive one execution through RAES for all orders 
in all series within the same class on the same side of the market per 
five-second interval. For purposes of this proposal, the following 
orders shall be deemed to be on the same side of the market:
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    \4\ While the appropriate FPC shall establish the length of the 
PACER interval, the Designated Primary Market Maker (``DPM'') for a 
particular class, with input from the trading crowd, shall have the 
ability to disengage and reactivate the order PACER for that class 
under the circumstances set forth in Amendment No. 1. These 
circumstances are discussed below.
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     Long calls and short puts (bullish side of the class)
     Short calls and long puts (bearish side of the class)
    For example, if Firm XYZ executes an order through RAES to buy 50 
calls for a particular option, it would be ineligible to receive 
additional RAES executions for either long calls or short puts in any 
series of that option class until the PACER interval period expired. 
Firm XYZ orders on the opposite side of the market (i.e., short calls 
and long puts) would be eligible for execution, subject to the PACER 
parameters applicable to the opposite side of the market (i.e., one 
order execution every x seconds). Firms XYZ's RAES-eligible orders sent 
through ORS that are received during the period the PACER interval 
precludes automatic execution (i.e., before x seconds expire) would not 
be routed to RAES and instead would be sent to PAR where they would be 
handled in accordance with applicable procedures.
    The PACER interval will apply only to RAES orders that would be 
assigned to market makers via standard RAES allocation methods (e.g., 
the Wheel or Variable RAES). As such, the PACER interval would not 
apply to RAES orders executed against EBOOK via ABP or ABP Split-
Price.\5\ As an example, if

[[Page 29372]]

the EBOOK represents the best price for a series along with Autoquote 
and ORS receives three RAES-eligible orders to buy the same series 
(submitted by the same member firm), the first order would be executed 
against the EBOOK (extinguishing the order on the book). The second 
order would be executed in RAES, activating the PACER interval timer. 
The third order, because it was received during the period the PACER 
interval was activated, would not receive automatic execution and 
instead would be routed to the PAR station.
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    \5\ ABP is an acronym for the Exchange's Automated Book Priority 
system. ABP enables a RAES order to execute against the book when 
the book represents the best price on the Exchange. See Securities 
Exchange Act Release No. 41995 (October 8, 1999), 64 FR 56547 
(October 20, 1999) (SR-CBOE-99-29). Under ABP Split Price, if an 
incoming RAES order is larger than a booked order that is 
establishing the Exchange's best price, the RAES order will be 
executed against the booked order. Formerly, the remainder of that 
RAES order would be executed in its entirety at the book price 
against market-makers participating on RAES. Under ABP Split Price, 
the RAES order is only executed at the booked price up to a pre-set 
``Book Price Commitment Quantity'' set by the FPC. Thereafter, if 
any part of the RAES order is still unfilled, the remainder 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 manual execution, whether against the book or competing 
members of the trading crowd. See Securities Exchange Act Release 
No. 43932 (February 6, 2001), 66 FR 10332 (February 14, 2001) (SR-
CBOE-00-21).
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    In Amendment No. 1, the CBOE revised the language of proposed Rule 
6.8(d)(vi) to clarify the circumstances in which the DPM for a 
particular class may disengage and reactivate PACER for that class. The 
Amendment states that the DPM may disengage PACER for a particular 
class, with input from the trading crowd, ``[w]hen there is a large 
influx of orders that route from RAES that are rerouted for manual 
handling such that there are more orders than can be handled 
expeditiously * * * .'' \6\ When the influx of orders subsides such 
that orders may again be handled expeditiously, the DPM in the affected 
class may activate PACER for that class upon receipt of approval by two 
Floor officials. In this connection, the CBOE represents that it will 
comply in all respects with CBOE Rule 6.8.08.\7\ Specifically, the CBOE 
states that it will document all instances in which PACER is disengaged 
in a class and subsequently reengaged during the same trading day, the 
reasons for such action, and the identity of the Floor Officials 
involved in the decision to reengage PACER.\8\
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    \6\ Amendment No. 1, supra note 3.
    \7\ CBOE Rule 6.8.08 states that ``[t]he Exchange will document 
in its Control Room log, or in any other format provided for by the 
Exchange, any action taken to disengage RAES or to operate RAES in a 
manner other than normal, the option classes affected by such 
action, the time such action was taken, the Exchange officials who 
undertook such action, and the reasons why such action was taken.''
    \8\ See Amendment No. 1, supra note 3.
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    In addition, in Amendment No. 1 the CBOE represented that it 
expects that PACER will be activated floor-wide in all classes under 
normal market conditions. The CBOE stated that, while the Equity FPC 
(``EFPC'') retains the authority to establish the length of the PACER 
interval, the EFPC normally meets only once every two weeks. This will 
preclude it from determining to alter the length of the PACER interval 
on an intraday basis. The CBOE stated that, as indicated in the 
original filing, the EFPC has the authority to deactivate PACER for a 
particular class or to establish the length of the PACER interval on a 
class-by-class basis. The CBOE represented that it will post on its 
public website the length of the PACER interval applicable to all 
affected classes.
2. Statutory Basis
    The Exchange believes the proposal represents an efficient 
mechanism whereby customers can continue to receive the benefits of 
automatic execution of their small option orders while at the same time 
allowing market makers to limit their exposure to artificial depth. For 
these reasons, the Exchange believes the proposal 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. Specifically, the Exchange believes the 
proposed rule change is consistent with the requirements under section 
6(b)(5) \9\ that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, and, in general, to protect investors 
and the public interest. Furthermore, the Exchange believes that the 
proposed rule change is consistent with the Act's requirement that an 
exchange's rules not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78(f)(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 not necessary or appropriate in furtherance 
of the purposes of the Act.

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 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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-2001-16 and should 
be submitted by June 20, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13532 Filed 5-29-01; 8:45 am]
BILLING CODE 8010-01-M