[Federal Register Volume 66, Number 164 (Thursday, August 23, 2001)]
[Notices]
[Pages 44391-44393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21309]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44718; File No. SR-CBOE-2001-33]


Self-Regulatory Organizations; Notice of Proposed Rule Change and 
Amendment No. 1 Thereto by the Chicago Options Exchange, Incorporated 
Relating to Step-up From the Designated Primary Market Maker's 
Autoquote Price

August 17, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 14, 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. 
On August 16, 2001, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\
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    \1\ 15 U.S.C. 78(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter to Debby Flynn, Assistant Director, Division of 
Market Regulation, Commission, from Steve Youhn, Attorney, CBOE, 
dated August 15, 2001. (``Amendment No. 1'') In Amendment No. 1, the 
Exchange made two changes to be proposed rule text. First, the 
Exchange modified the reference point from which the Exchange will 
step-up from the Exchange BBO to the Autoquote price. The Exchange 
amended the rule text to state that step-up will be measured from 
the price for the series as established by the Autoquote or the 
DPM's proprietary automated quotation updating system. Second, 
Amendment No. 1 amended the proposed rule text to clarify that if 
Autoquote is not activated for a particular class or series, that 
class or series would not be designated as a step-up class. 
Specifically, the amendment deleted the phrase ``unless otherwise 
designated by the appropriate FPC'' from the proposal.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.

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

    The Exchange proposes to clarify, for purposes of automated step-
up, that the term ``Exchange's best bid or offer'' would refer to the 
Designated Primary Market Maker's (``DPM'') Autoprice price or the 
price from the DPM's proprietary automated quotation updating system. 
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 basis for the proposed rule change and 
discussed any comments if 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 the Retail Automatic Execution 
System (``RAES'') when the Exchange's best bid or offer (``Exchange's 
BBO'') 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 (``step-up''), 
so long as the price on the away market is better than the Exchange's 
BBO by no more than one tick (``step-up amount'').\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\
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    \4\ The Commission approved the CBOE automatic step-up plan in 
Exchange Act Release No. 40096 (June 16, 1998), 63 FR 34209 (June 
23, 1998) (order approving SR-CBOE-98-13). CBOE Rule 6.42 
establishes the minimum trading increments for bids and offers. For 
option series quoted at or below $3 per contract, the minimum 
increment is 5 cents. For option series quoted above $3, the trading 
increment is 10 cents.
    \5\ The Commission published notice of the filing and immediate 
effectiveness of a CBOE proposed rule change that would allow the 
DPM to vary the step-up amount by order size parameter. See Exchange 
Act Release No. 44490 (June 28, 2001), 66 FR 35681 (July 6, 2001) 
(SR-CBOE-2001-32). The Exchange also has a filing before the 
Commission (SR-CBOE-2001-08), which would allow the DPM to vary the 
step-up amount by order entry firm.
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    As mentioned above, in determining whether the CBOE price is 
inferior to that of another market, CBOE measures from the ``the 
Exchange's BBO.'' The term ``Exchange's BBO'' could be interpreted to 
include any price displayed by the Exchange, whether that price 
represents Autoquote, a customer order in the limit order book, or a 
market maker's quote. The purpose of this rule filing is to clarify the 
term ``Exchange's BBO.'' Under the proposal, the Exchange would amend 
CBOE Rule 6.8.02 to include new subsection (b).
    Under this new subsection, CBOE proposes that the term ``Exchange's 
BBO'' for purposes of the step-up feature would mean the Autoquote 
price as established by the DPM or the DPM's proprietary automated 
quotation updating system \6\ for the class or series. Under this 
change, the Exchange will ``step-up'' to an away market price when the 
away market price is better than the Exchange's Autoquote price or the 
DPM's proprietary automated quotation updating system for the same 
series by

[[Page 44392]]

no more than the step-up amount applicable to that series. If Autoquote 
or the DPM's proprietary automated quotation updating system is not 
activated for a particular class or series, step-up shall not be 
applicable to that particular class or series. With the exception of 
this definitional change, the Exchange's step-up procedures as 
contained in CBOE Rule 6.8.02 remain unchanged.
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    \6\ See Amendment No. 1, supra note 3.
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    As an example, assume the following scenario:
     CBOE Autoquote price is $3-$3.30
     Customer order in EBook to sell for $3.20
     Price on Pacific Exchange (``PCX'') is $3-$3.10
    In this example, the Exchange's ``BestQuote'' \7\ would be $3-
$3.20, with the $3.20 price representing a customer limit order in 
EBook. Under the current rule, a RAES order to buy would be executed on 
RAES at the PCX price of $3.10 because the CBOE EBook price is within 
one tick (i.e., $0.10) of the PCX price. Thus, CBOE market participants 
would be obligated to fill this order automatically, even though the 
Autoquote price or the DPM's proprietary automated quotation updating 
system price is two ticks away from the PCX price. The order in the 
EBook that triggered the step-up would not trade against the RAES order 
and instead would remain on the book.
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    \7\ BestQuote simply refers to the best bid and offer currently 
offered on the Exchange.
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    The Exchange believes it is reasonable to establish as the 
Exchange's BBO the Autoquote price or the DPM's proprietary automated 
quotation updating system for the series for purposes of the step-up 
feature. The Exchange notes that a customer limit order may not 
necessarily be representative of the prevailing market. If that 
customer limit order is, in fact, out of alignment with the prevailing 
market price, DPMs and market makers, under the current rule, would 
still be obligated to fill orders automatically at an away market's 
price if that CBOE customer limit order is within the step-up amount 
(i.e., one tick) of the away market price. The Exchange believes that 
this places CBOE market participants at risk of having to fill orders 
based on errant or uninformed prices.
    Furthermore, given the differences in proprietary automatic 
quotation systems used by market participants on different exchanges, 
there often are times when one exchange's prices may be several ticks 
away from another market's prices for a particular class or series. For 
example, in setting the Autoquote price, a specialist on one exchange 
may input a volatility figure that is considerably higher or lower than 
the volatility figure used by the CBOE DPM. As a result, the away 
market price may be expected to be different (perhaps by several ticks) 
from the CBOE Autoquote price or the DPM's proprietary automated 
quotation updating system. The Exchange believes that to force CBOE 
crowd members to step-up not from their Autoquote price, but from an 
order that may or may not bear any relation to their Autoquote price, 
places them at substantial financial risk by forcing them to 
automatically execute orders at prices they do not believe accurately 
represent the current market. When the away market is within the step-
up amount of the CBOE Autoquote price or the DPM's proprietary 
automated quotation updating system, however, the Exchange represents 
that at least CBOE market participants are assured that when a CBOE 
order is ``stepped-up,'' that it bears some relation to their Autoquote 
price or the DPM's proprietary automated quotation updating system 
price.
    Accordingly, in the above example under this proposal, a RAES order 
to buy would not receive automatic step-up and instead, would be routed 
to the floor for manual handling. If, however, the CBOE Autoquote price 
were instead $3.00-$3.20, the incoming RAES order to buy would receive 
automatic step-up and would be executed at $3.10, the price of the away 
market.
2. Statutory Basis
    This proposal would clarify that, for step-up purposes, the 
Exchange's BBO would only reflect the DPM's Autoquote price or the 
DPM's proprietary automated quotation updating system. Accordingly, 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 Section 6(b)(5) \9\ requirements 
that the rules of an exchange 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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 self-regulatory organization 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 CBOE. All submissions should refer File No. SR-
CBOE-2001-33 and should be submitted by September 13, 2001.

[[Page 44393]]

    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).

Jonathan G. Katz,
Secretary.
[FR Doc. 01-21309 Filed 8-22-01; 8:45 am]
BILLING CODE 8010-01-M