[Federal Register Volume 66, Number 136 (Monday, July 16, 2001)]
[Notices]
[Pages 37079-37081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44530 File No. SR-CBOE-2001-27]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., Relating to Rerouting of Certain Orders

July 9, 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 May 29, 2001, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
by the CBOE. 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 CBOE proposes to amend Exchange Rule 6.8, RAES Operations, to 
make it clear than an order rerouted from RAES may be routed to a 
location of the sending firm's choice. Below is the text of the 
proposed rule change. New text is in italics. Proposed deletions are in 
[brackets].
* * * * *

Chicago Board Options Exchange, Inc. Rules

* * * * *

Chapter IX--Doing Business with the Public

* * * * *

RAES Operations

Rule 6.8.
    (a)-(c) No change.
    (d) Execution on RAES.
    (i) 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 this Rule 6.8 and the Interpretations to this 
rule. A buy order will pay the offer, a sell order sell at the bid. 
Marketable limit orders will not be executed to sell for less or buy 
for more than the specified price, but the order can be executed to 
sell for a higher price or buy for a lower price. However, if the 
order's limit price is under $3, RAES will execute the order only if 
the necessary bid or offer is \1\/2\ point or less from the limit 
price. If the order's limit price is $3 of more, RAES will execute the 
order only if the necessary bid or offer is one dollar or less from the 
limit price.
    (ii) A Market-Maker logged on to participate in RAES (a 
``Participating Market-Maker'') will be designated as contra-broker on 
the trade.
    (iii) 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.
    (iv) When the best bid or offer on the Exchange's book constitutes 
the best bid or offer on the Exchange, contra-side incoming RAES orders 
shall be executed in accordance with either (A)[(i)] or (B)[(ii)] 
below, as determined by the appropriate Floor Procedure Committee is a 
class-by-class basis.
    (A)[(i)] 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 RAES order eligibility size for that class, such fact shall 
be denoted in the Exchange's disseminated quote by a ``Book 
Indicator''. An incoming 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 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 (or to another 
location in the event of system problems or contrary firm routing 
instructions) 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.
    (B)[(ii)] An incoming 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 of the RAES order was executed.
    (v) Notwithstanding sub-paragraph (d)(iv), for a six month pilot 
program ending August 21, 2001, for any series of options where the bid 
or offer generated by the Exchange's Autoquote system (or any Exchange 
approved proprietary quote generation system used in lieu of the 
Exchange's Autoquote system) crosses or locks the Exchange's best bid 
or offer as established by an order in the Exchange's customer limit 
order book, orders in RAES for options of that series will not be 
automatically executed but instead will be rerouted on ORS to the crowd 
PAR terminal or to another location in the event of system problems or 
contrary firm routing instructions.
    (e)-(g) No change.
Interpretations and Policies
    .01 No change.
    .02 Orders to buy or sell options that are multiply traded in one 
or more markets in addition to the Exchange will not be automatically 
executed on RAES at prices inferior to the current best bid or offer in 
any other market, as such best bids or offers are identified in RAES. 
In respect of those classes of options that have been specifically 
designated by the appropriate Floor Procedure Committee as coming 
within the scope of this sentence (``automatic step-up classes''),

[[Page 37080]]

under circumstances where the Exchange's best bid or offer is inferior 
to the current best bid or offer in another market by no more than the 
``step-up amount'' as defined below, such orders will be automatically 
executed on RAES at the current best bid or offer in the other market. 
In respect of (i) automatic step-up classes of options under 
circumstances where the Exchange's best bid or offer is inferior to the 
current best bid or offer in another market by more than the step-up 
amount, or (ii) in respect of series of option classes designated by 
the appropriate Floor Procedure Committee or its Chairman under 
circumstances where the NBBO for one of the series is cross (e.g., 6.10 
bid, 6 asked) or locked (e.g., 6 bid, 6 asked), or (iii) in respect of 
specified automatic step-up classes or series of options or specified 
markets under circumstances where the Chairman of the appropriate Floor 
Procedure Committee or his designee has determined that automatic step-
up should not apply because quotes in such options or markets are 
deemed not to be reliable, or (iv) in respect of classes of options 
other than automatic step-up classes where the Exchange's best bid or 
offer is inferior to the current best bid or offer in another market by 
any mount, such orders will be rerouted for nonautomated handling to 
the DPM or OBO for that class of options, or to any other location in 
the event of system problems or contrary routing instructions for the 
firm that forwarded the order to RAES. [for non-automated handling.] If 
the order has been rerouted to the DPM or OBO, the [The] DPM or OBO 
will report the execution or non-execution of such orders to the firm 
that originally forwarded the order to RAES. With respect to the orders 
that are rerouted for manual handling pursuant to (ii) above, the 
appropriate Floor Procedure Committee may determine to have the orders 
for a particular series within a designated class of options executed 
on RAES notwithstanding the fact that the NBBO is either cross or 
locked. Also, with respect to (ii) above, the appropriate Floor 
Procedure Committee may determine to have the orders rerouted for 
manual handling only when the CBOE RAES becomes cross or locked as a 
result of applying the step-up amount. As used in this Interpretation 
and Policy .02, the term ``step-up amount'' shall mean the minimum 
increment for options of that series established pursuant to Rule 6.42, 
or any greater amount established by the appropriate Floor Procedure 
Committee in respect of specified automatic step-up classes or series 
of options. The procedures described in this Interpretation .02 shall 
not apply in circumstances where a ``fast market'' in the options that 
are the subject of the orders in question has been declared on the 
Exchange or where comparable conditions exist in the other market such 
that firm quote requirements do not apply.
    .03-.08 No change.
* * * * *

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

    In its filing with the Commission, 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 is proposing to amend Exchange Rule 6.8 to make it 
clear that an order that is rerouted from RAES may be routed to a 
location designated by the order routing firm. Currently, there are two 
sections in the RAES rule that provide that orders rerouted from RAES 
will be routed to the Designated Primary Market-Maker (``DPM'') or to 
the Public Automated Routing (``PAR'') terminal in the trading 
crowd.\3\ Specifically, paragraph (d)(iv)(A) of Rule 6.8 states that 
where a RAES order is executed against a booked order and there is a 
remaining balance, that remaining balance may be routed to one of three 
locations. The first location which the rule designates as a location 
for the remaining balance is ``the crowd PAR terminal if Autoquote is 
not in effect for that series.'' The second section in Rule 6.8 which 
describes an order rerouted from RAES being routed to a PAR terminal is 
in Interpretation .04 to the rule, which governs orders that are 
rerouted because another market is displaying a better bid or offer. 
Interpretation .04 states that ``in respect of classes of options other 
than automatic step-up classes where the Exchange's best bid or offer 
is inferior to the current best bid or offer in another market by any 
amount, such orders will be rerouted to the DPM or OBO for that class 
of options.''
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    \3\ DPMs in each trading crowd typically are responsible for 
managing the orders that are routed to the PAR terminal in each 
crowd.
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    In both of these cases, the Exchange was not intending to limit the 
alternative locations to which a firm could choose to have a rejected 
RAES order route. Instead, the rules were meant to describe the default 
locations to which the RAES order would route absent any contrary 
indications from the firm. In fact, paragraph (d)(v) states that orders 
that are rejected from RAES pursuant to this provision will ``be 
rerouted on ORS to the crowd PAR terminal or to another location in the 
event of system problems or contrary firm routing instructions.'' 
[emphasis added]. The Exchange is, therefore, making clear in its rules 
that a firm may choose to determine to have its orders routed to 
another location other than to PAR or to the DPM.\4\ The Exchange 
believes that, unless there is some overriding regulatory concern, 
firms should be able to choose the location to which their orders 
should be routed so that they may handle their business in the most 
effective manner.
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    \4\ Currently, the Exchange's ORS provides for the order to 
route to a firm booth (whereupon it may be rerouted electronically 
from a BART terminal) or to a crowd printing terminal. The Exchange 
may provide other routing locations in the future.
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    Additionally, system problems may occasionally prevent the Exchange 
from routing an order to the PAR terminal or to the DPM. In these 
events, although this fact may be obvious, the Exchange believes that 
it should specifically note this possibility in its RAES rule in those 
locations where it is not presently noted.
2. Statutory Basis
    Because the proposed rule amends the Exchange's rules to make clear 
that a firm may determine where to route its RAES rejected orders and 
because the proposed rule otherwise makes clear that there may be some 
circumstances where RAES orders will need to be rerouted due to system 
problems, the proposed rule change is consistent with Section 6(b) of 
the Act \5\ in general and furthers the objectives of section 
6(b)(5)\6\ in particular in that it is designed to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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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

[[Page 37081]]

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act,\7\ and subparagraph (f)(1) of Rule 19b-4 
thereunder.\8\ At any time within 60 days of the filing of the 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.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(1).
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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. CBOE-2001-27 and should 
be submitted by August 6, 2001.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17653 Filed 7-13-01; 8:45 am]
BILLING CODE 8010-01-M