[Federal Register Volume 66, Number 130 (Friday, July 6, 2001)]
[Notices]
[Pages 35681-35682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-16881]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44490; File No. SR-CBOE-2001-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to Automatic Step-up Based on Order 
Size Parameters

June 28, 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 June 11, 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. The proposed rule change has been filed by the CBOE as a 
``non-controversial'' rule change under rule 19-4(f)(6).\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to allow the appropriate floor procedure 
committee (``FPC'') to establish the size of the automatic step-up 
amount applicable to orders entered through the Exchange's Retail 
Automatic Execution System (``RAES'') based upon order size parameters. 
The text of the proposed rule change is available at the Office of the 
Secretary, CBOE and at the Commission.

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 Exchange included statements 
concerning the purpose of and basic 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 parts of such 
statements.

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

1. Purpose
    Interpretation .02 to CBOE Rule 6.8 establishes the process for the 
automatic execution of orders through RAES when the Exchange's best bid 
or offer is inferior to that of another market. Under this provision, 
the Exchange automatically fills any equity option order submitted 
through RAES at any better price being quoted in another market, so 
long as the price on the away market is better by no more than one tick 
(``automatic step-up'').\4\ If the price on the away market is better 
by more than the automatic step-up amount (i.e., more than one-tick), 
the order is rerouted to the DPM for non-automated handling.\5\ The 
purpose of this rule filing is to provide for the step-up parameters to 
be based upon order size (``order size parameters'').
---------------------------------------------------------------------------

    \4\ CBOE Rule 6.42 establishes the minimum trading increments 
for bids and offers.
    \5\ The Commission approved the CBOE automatic step-up plan in 
Securities Exchange Act Release No. 40096 (June 16, 1998), 63 FR 
34209 (June 23, 1998) (order approving SR-CBOE-98-13)(``automatic 
step-up Approval Order''). Pursuant to CBOE Rule 6.42, the trading 
increment for option series quoted at or below $3 per contract is 5 
cents. For option series quoted above $3, the trading increment 
shall be 10 cents.
---------------------------------------------------------------------------

    Under the proposal, the appropriate FPC shall have the authority to 
establish the size of the step-up amount based upon order size 
parameters. This enhancement will allow automatic execution on RAES at 
the NBBO when the price displayed on a competing market is within a 
designated number of ticks of the price displayed by CBOE, provided the 
size of the order falls within the specified order size parameters. For 
example, the order size parameters might be established such that 
orders of 1-3 contracts receive 3-tick step-up, orders of 4-6 contracts 
receive 2-tick step-up, orders of 7-10 contracts receive 1-tick step-
up, and orders of 11 or more contracts receive no step-up.\6\ If the 
CBOE price is not within the designated step-up amount to

[[Page 35682]]

the away market price, the order shall be routed for manual handling.
---------------------------------------------------------------------------

    \6\ In this instance, orders of 1-3 contracts would be executed 
within RAES at the NBBO provided the price displayed on CBOE is 
within 3-ticks of the price displayed by the competing market.
---------------------------------------------------------------------------

    As discussed above, the appropriate FPC shall have the authority to 
establish the size of the step-up amount based upon order size 
parameters. The FPC shall determine which classes or series are 
eligible for step-up and, correspondingly, may establish the amount of 
the step-up. In considering which classes or series are eligible for 
step-up, the FPC may consider such factors as the open interest in the 
requested option, the average daily volume, customer requests, and any 
other factors the FPC deems appropriate. While the FPC will have the 
ability to vary the order size parameters by class or series, it also 
will have the authority to mandate that a minimum step-up amount be 
applicable either on a floor-wide or class-by-class basis. Consistent 
with current Interpretation .02 to CBOE Rule 6.8, the appropriate FPC 
shall also have the authority to designate or remove classes or series 
from the list of those eligible for step-up enhancement. Finally, the 
Exchange will publish a list of all option classes eligible for step-up 
enhancement in an Informational Circular distributed to members.
    The Exchange believes that allowing the FPC to increase the amount 
of the automatic step-up amount will promote competition. As the 
Commission noted in the automatic step-up Approval Order:

    By automating the execution of eligible retail orders for equity 
options through the RAES Auto-Step-Up, the amended Interpretation 
and Policy. 02 should help to insure that investors receive prompt, 
automatic execution of RAES orders at the best available prices, 
even if those prices are being quoted in a market other than the 
Exchange, when the better prices in other markets of not improve on 
the CBOE's market by more than one tick. This proposal should 
minimize the delay inherent in manually handling orders in this 
circumstance, and there by reduce the risk to investors that, as a 
result of an adverse move in the market while their orders are being 
manually handled, they may receive an inferior execution.\7\
---------------------------------------------------------------------------

    \7\ See note 5, supra.

    This proposal will authorize the appropriate FPC to increase the 
step-up amount by more than 1-tick for public customer orders within 
established order size parameters. As such, investors not only will 
have the opportunity to receive better-priced executions, but they also 
will have the opportunity to receive more expedient executions.
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.\8\ Specifically, the Exchange believes the 
proposed rule change is consistent with the requirements of Section 
6(b)(5),\9\ which provides that the rules of an exchange must 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78(f)(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    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 Exchange 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder \11\ 
because the proposed rule change: (1) Does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for 30 days from the date of the filing, or such shorter time that the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the Exchange has given the 
Commission written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date of the 
proposed rule change.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). For purposes only of accelerating 
the operative date of this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \12\ The Commission has determined to waive the requirement the 
CBOE provide the Commission with written notice of its intent to 
file the proposed rule change at least five business days prior to 
the filing date.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
    The Exchange has requested that the Commission accelerate the 
operative date of the proposal. The Commission finds good cause for 
accelerating the operative date of the proposed rule change. The 
Commission notes that it approved a similar proposal filed by the 
American Stock Exchange (``Amex'').\13\ Approval of this proposal on an 
accelerated basis will enable the CBOE to compete on an equal basis 
with other exchanges and thus is consistent with Section 6(b)(8) of the 
Act.\14\
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 44013 (February 28, 
2001), 66 FR 13816 (March 7, 2001) (approving SR-Amex-01-05).
    \14\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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 Section. Copies of such filing will also 
be available for inspection and copying at the principal office of 
CBOE. All submissions should refer to File No. SR-CBOE-2001-32 and 
should be submitted by July 27, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Jonathan G. Katz,
Secretary.
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 01-16881 Filed 7-5-01; 8:45 am]
BILLING CODE 8010-01-M