[Federal Register Volume 66, Number 226 (Friday, November 23, 2001)]
[Notices]
[Pages 58766-58768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29254]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45067; File No. SR-CBOE-2001-56]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to Firm Disseminated Market 
Quotes

November 16, 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 October 22, 2001, the Chicago Board Options Exchange, Inc. (``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 Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to

[[Page 58767]]

grant accelerated approval to the proposed rule change.
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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 CBOE Rule 8.51, Firm Disseminated Market 
Quotes, to address customer limit orders. Below is the text of the 
proposed rule change. Additions are italicized.

Rule 9.51  Firm Disseminated Market Quotes

    (a)-(b) no change
    (c) Firm Quote Size
    (1) no change
    (2) The firm quote requirement size for non-broker-dealer orders 
shall be the size that the Exchange periodically publishes along with 
the quotes disseminated to vendors. In the event the Exchange has not 
published a size along with its quotes for a particular series, then 
the firm quote requirement size for non-broker-dealer orders shall be 
that size published by the Exchange in a different manner (e.g., on its 
website). The Exchange also will publish separately the firm quote 
requirement size for broker-dealer orders. In the case of broker-dealer 
orders, if the size for a particular series disseminated along with the 
quotes is less than the size published for broker-dealer orders, then 
the firm quote requirement for broker-dealer orders shall be the size 
published along with the quotes.
    (a) When the disseminated quote represents a customer limit order 
in EBook, the firm quote requirement for non-broker-dealer orders shall 
be the greater of the size of the customer limit order or a size 
predetermined by the appropriate FPC. When the disseminated quote 
represents both a customer limit order in EBook and the trading crowd's 
quote, the firm quote requirement for non-broker-dealer orders shall be 
the aggregate size of the customer limit order and the size that the 
Exchange periodically publishes for that particular series.
* * * * *

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
    On November 17, 2001, the Commission amended rule 11Ac1-1 under the 
Act (``Quote Rule'') \3\ to require options exchanges to publish firm 
quotes. The amended Quote Rule requires options exchanges to either: 
(1) comply with the Quote Rule as it applies in the equity markets and 
collect from their members and make available to vendors the size 
associated with each quotation; or (2) establish by rule and 
periodically publish the quotation size for which their members' 
quotations are firm. On March 30, 2001, the Exchange submitted a 
proposal to amend CBOE rule 8.51, Firm Disseminated Market quotes, to 
conform to the requirements of the Quote Rule. The Commission approved 
this proposal initially on a pilot basis on April 2, 2001\4\ and, 
subsequently, on a permanent basis on June 2, 2001.\5\ This filing 
amends CBOE rule 8.51 to codify the Exchange's firm quote treatment of 
customer limit orders.
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    \3\ 17 CFR 240.11Ac1-1. See Exchange Act Release No. 43591 (Nov. 
17, 2000), 65 FR 75439 (Dec. 1, 2000).
    \4\ See Exchange Act Release No. 44145 (April 2, 2001), 66 FR 
18662 (April 10, 2001) (approving SR-CBOE-2001-15 on a pilot basis.
    \5\ See Exchange Act Release No. 44383 (June 2, 2001), 66 FR 
30959 (June 8, 2001) (approving SR-CBOE-2001-15 on a permanent 
basis.
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    CBOE does not currently have the systems capability to decrement 
actual quotation size to reflect executions except when the quotation 
size represents an order in EBook. For this reason, when Autoquote or a 
manual quote establishes the best price on the Exchange, the Exchange's 
firm quote requirement for non-broker-dealer orders is the size that 
the Exchange periodically publishes on its website and along with the 
bid-ask quotes disseminated to vendors.\6\
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    \6\ See CBOE rule 8.51(c)(2).
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    When a customer limit order in EBook establishes the best bid or 
offer, however, CBOE complies with the Quote Rule in a different 
manner.\7\ As discussed above, CBOE systems are able to decrement 
disseminated size for executions when the disseminated size represents 
a booked order. For this reason, when a customer limit order in EBook 
establishes the best bid or offer, CBOE disseminates the actual size of 
the booked limit order. In this instance, the Exchange must be firm for 
the greater of its disseminated size or a number predetermined by the 
appropriate floor procedure committee (``FPC''). The effect of this 
provision is two-fold. First, it ensures that the Exchange will be firm 
for at least the size of the disseminated booked order. Second, it also 
allows the appropriate FPC to establish a higher firm quote size 
guarantee when a booked order is the prevailing price. For example, in 
conjunction with Automated Book Price Split-price, if the equity floor 
procedure committee establishes a book price commitment quantity of ten 
contracts, it could correspondingly establish the minimum firm quote 
size guarantee at ten contracts. Thus, the Exchange would be firm for 
either the size of the booked order or ten contracts, whichever is 
greater. In no event would the firm quote size be smaller than the 
actual size of the disseminated booked order. The size of the minimum 
firm quote guarantee would be published on the CBOE Web site.
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    \7\ Book Market Indicators are disseminated to Options Price 
Reporting Authority (``OPRA'') when the book bid, offer, or both 
improve, or equal the Designated Primary Market Marker/Crowd (``DPM/
Crowd'') quote. If the Book Bid improves or equals the DPM/Crowd 
market bid, then the Book Market Indicator ``B'' will be 
disseminated with the quote to OPRA. If the Book Offer improves or 
matches the DPM/Crowd market offer, then the Book Market Indicator 
``O'' is disseminated with the quote. If the Book Bid and Offer 
improves or equals the DPM/Crowd market, then the Book Market 
Indicator ``C'' is disseminated with the quote.
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    When a customer limit order in EBook matches the best bid or offer 
of the trading crowd, the size disseminated to OPRA, as well as the 
firm quote requirement, is the aggregate of the booked order and the 
size that the Exchange periodically publishes. For example, if in a 
particular series EBook contains an order for eleven contracts and the 
firm quote size as published on the Exchange's Web site is 50 
contracts, then the disseminated size as well as the firm quote size 
would be 61 contracts for that series. When trades execute against the 
booked order, however, the disseminated size would decrement. When 
executions extinguish the booked order, the firm quote requirement 
would be the size that the Exchange periodically publishes on its Web 
site and along with the bid-ask quotes disseminated to vendors.\8\ To 
codify the firm quote rules pertaining to customer limit orders, the 
Exchange proposes to add section (c)(2)(a) to CBOE Rule 8.51.
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    \8\ Using the above example, an execution of 12 contracts (which 
would extinguish the booked order of 11 contracts) would result in a 
new firm quote requirement, which would be the size (i.e., 50 
contracts) that appears on the CBOE Web site.

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[[Page 58768]]

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of section 6 of the Act in general, 
and in particular, with section 6(b)(5),\9\ in that it is designed to 
perfect the mechanisms of a free and open market and a national market 
system, protect investors and the public interest, and promote just and 
equitable principles of trade by increasing transparency and by 
providing the market place with more information upon which to base 
order routing decisions.
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    \9\ 15 U.S.C. 78f(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.

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

    Pursuant to section 19(b)(2) of the Act,\10\ the Exchange requests 
accelerated effectiveness of this rule filing. The Exchange believes 
that acceleration will enable it to continue uninterrupted its 
compliance with the Quote Rule. Moreover, the CBOE believes that 
acceleration will enable it to provide greater liquidity guarantees to 
customers when customer limit orders match the best bid or offer of the 
trading crowd. For these reasons, the Exchange believes it is both 
appropriate and in the public interest of investors for the Commission 
to accelerate the effective date of this filing.
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    \10\ 15 U.S.C. 78s(b)(2).
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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 also will be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to File No. SR-CBOE-2001-56 and 
should be submitted by December 14, 2001.

V. Commission Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange,\11\ and, in 
particular, section 6(b)(5) of the Act \12\ in that the proposed rule 
change has been designed to remove impediments to and to perfect the 
mechamism of a free and open market and a national market system, while 
also protecting investors and the public interest. Specifically, the 
Commission believes that by disseminating the size of customer limit 
orders and providing a firm quote at a guaranteed size equal to the 
aggregate of a customer limit order and the crowd guarantee at the same 
price, the proposed rule change should provide increased transparency 
to the benefit of market participants that trade listed options.
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    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause, consistent with section 19(b)(2) 
of the Act,\13\ for granting the Exchange's request for approval of the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission believes that granting accelerated approval to the proposed 
rule change should allow the CBOE to continue its compliance with the 
Quote Rule without interruption or delay.
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    \13\ 15 U.S.C. 78s(b)(2).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the Exchange's proposed rule change (File No. SR-CBOE-
2001-56) is approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29254 Filed 11-21-01; 8:45 am]
BILLING CODE 8010-01-M