[Federal Register Volume 66, Number 160 (Friday, August 17, 2001)]
[Notices]
[Pages 43278-43279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20769]



[[Page 43278]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44683; File No. SR-CBOE-2001-41]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Chicago Board Options Exchange, Inc. Relating to the Display of 
Indicative Spread Prices

August 10, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on July 19, 2001, the Chicago Board Options Exchange, Inc. 
(``Exchange'' or ``CBOE'') 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 July 20, 2001, the CBOE submitted Amendment No. 1 to 
the proposed rule change.\3\ The proposed rule change, as amended, has 
been filed by the CBOE as a ``non-controversial'' rule change under 
Rule 19b-4(f)(6) \4\ under the Act. 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\ See letter from Nancy Nielsen, First Vice President & Deputy 
General Counsel, CBOE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated July 18, 2001 
(``Amendment No. 1''). In Amendment No. 1, the CBOE corrected its 
original filing to include a request for the Commission to waive the 
five-business-day pre-filing requirement and the 30-day delay in the 
operative date of the proposed rule change under Rule 19b-4(f)(6) 
under the Act. See 17 CFR 240.19b-4(f)(6).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to adopt a new interpretation to CBOE Rule 8.7. 
Below is the text of the proposed rule change. Proposed new language is 
italicized.
* * * * *
    .10  Market-Makers may display indicative spread prices on the 
websites of member organizations through a system licensed from a third 
party, developed by the Exchange or otherwise. Such indicative prices 
shall not be regarded as firm quotes, and a Market-Maker shall not be 
obligated to execute at the indicative prices spread orders that are 
entered into 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, as 
amended, 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 CBOE states that a spread order is an order to buy a stated 
number of option contracts and to sell a stated number of option 
contracts of the same class of options. The CBOE represents that there 
are various types of spread transactions. For example, a typical 
calendar spread order would be to buy ten March call options and to 
sell ten June call options of the same class. The CBOE states that 
spread transactions can be used by investors in a number of trading 
strategies.
    The CBOE represents that market-makers at the Exchange are often 
willing to execute a spread transaction at a net price that is better 
than the aggregate price of executing each leg of the spread 
separately. However, the CBOE states that there is currently no 
systematic means by which market-makers can communicate their 
willingness to execute spread transactions at favorable prices to 
investors who might be interested in such spread transactions. By 
adopting the proposed Interpretation, the CBOE intends to encourage 
market-makers to post indicative prices for spreads on the websites of 
member organizations through a system licensed from a third party, 
developed by the Exchange or otherwise.
    Initially, the CBOE represents that it intends to license the 
software for such a system (called the ``iSpreads System'') from a 
third party. The CBOE states that it may later develop its own 
proprietary software to operate such a system. The CBOE states that it 
will make this system available to all CBOE market-makers on its 
trading floor. CBOE members and member firms who wish to use the system 
from off the trading floor may do so by obtaining their own license 
from the third party. Use of this system is not mandatory; a market-
maker is not required to post indicative spread prices at all, and, if 
he chooses to do so, he is free to use some mechanism other than the 
system being made available by the Exchange.
    The CBOE states that market-makers who choose to use the iSpreads 
System can post indicative spread prices for selected options classes 
on the websites of participating member organizations. Depending on how 
the member organization wishes to use the system, a customer either can 
search directly on the firm's publicly accessible website to find 
indicative prices for the particular spread in which he is interested, 
or he can contact his broker at the firm and ask the broker to conduct 
the search on an internal site accessible to the firm. Customer orders 
would be sent to the CBOE market for execution in accordance with 
current practices, by being phoned into a member firm's order desk or 
transmitted via an electronic order routing system. Once a spread order 
has been transmitted to the Exchange, it will be executed in accordance 
with the Exchange's current trading rules. No special allocation rules 
or priority rules are being created.
    The CBOE states that the iSpreads System should provide significant 
benefits to customers. The CBOE represents that it will provide 
improved information about spread prices and help customers get their 
spread orders executed at a price that is better than executing each 
leg of the spread separately.
    The proposed Interpretation also provides that the indicative 
spread prices shall not be regarded as firm quotes, and a market-maker 
shall not be obligated to execute at the indicative prices spread 
orders that are entered into the market. The Exchange believes that 
attempting to obligate a market-maker to execute a spread order at the 
posted indicative price would create a disincentive to his use of the 
system. The proposed Interpretation makes it clear to all market 
participants that the indicative spread prices are not firm quotes and 
may not be available when an order is sent to the Exchange for 
execution. A similar disclaimer will be posted on the websites of 
member firms displaying the indicative spread prices.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6 of the Act \5\ in general, and with Section 
6(b)(5) of the Act \6\ specifically, because it is designated to

[[Page 43279]]

remove impediments to and perfect the mechanism of a free and open 
market and national market system, and, in general, to protect 
investors and the public interest. In particular, the CBOE states that 
the proposed Interpretation is intended to benefit customers by 
providing them with improved information about spread prices. The CBOE 
states that the proposed Interpretation is also intended to help 
customers get their spread orders executed at a better price than 
executing each leg of the spread order separately.
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    \5\ 15 U.S.C. 78f.
    \6\ 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, as 
amended, will impose a burden on competition that is not necessary or 
appropriate in furtherance of 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 either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change, as amended: (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 after the date of filing, 
or such shorter time as the Commission may designate if consistent with 
protection of investors and the public interest; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission, the proposed rule 
change, as amended, has become effective pursuant to Section 
19(b)(3)(A) of the Act \7\ and Rule 19b-4(f)(6) \8\ thereunder.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The CBOE seeks to have the proposed 
rule change, as amended, become operative immediately.\9\
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    \9\ See supra note 3.
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change, as 
amended, operative as of July 19, 2001.\10\
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    \10\ 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).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally 
requires that a self-regulatory organization give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior the date of filing of the proposed rule 
change. However, Rule 19b-(f)(6)(iii) permits the Commission to 
designate a shorter time. The CBOE seeks to have the five-business-day 
pre-filing requirement waived with respect to the proposed rule change, 
as amended. \11\
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    \11\ See supra note 3.
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    The Commission has determined to waive the five-business-day pre-
filing requirement.
    At any time within 60 days of the filing of the proposed rule 
change, as amended, 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.\12\
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    \12\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78(b)(3)(C).
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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, 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, 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-2001-41 and should 
be submitted by September 7, 2001.

     For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-20769 Filed 8-16-01; 8:45 am]
BILLING CODE 8010-01-M