[Federal Register Volume 66, Number 233 (Tuesday, December 4, 2001)]
[Notices]
[Pages 63083-63084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29931]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45103; File No. SR-CBOE-00-42]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Chicago Board Options Exchange, Inc. Eliminating the 
Obligation of Designated Primary Market-Makers To Accord Priority to 
Non-Public Customer Orders

November 26, 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 August 29, 2000, the Chicago Board Options Exchange, Inc. (``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 CBOE Rule 8.85 (DPM Obligations) 
regarding obligations of Designated Primary Market-Makers (``DPMs'') 
such that when a DPM represents an order as agent, the DPM is required 
to accord priority only to those orders of public customers over the 
DPM's principal transactions. The text of the proposed rule change is 
below. Additions are in italics.
    RULE 8.85. (a) No change.
    (b) Agency Transactions. Each DPM shall fulfill all of the 
obligations of a Floor Broker (to the extent that the DPM acts as a 
Floor Broker) and of an Order Book Official under the Rules, and shall 
satisfy each of the following requirements, in respect of each of the 
securities allocated to the DPM:
* * * * *
    (iii) accord priority to any public customer order which the DPM 
represents as agent over the DPM's principal transactions, unless the 
customer who placed the order has consented to not being accorded such 
priority;
* * * * *

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
    The CBOE proposes to amend CBOE Rule 8.85 regarding a DPM's 
obligation to represent orders. Currently, CBOE Rule 8.85(b)(iii) 
requires a DPM to accord priority to any order which the DPM represents 
as agent over the DPM's principal transactions, unless the customer who 
placed the order has consented to not being accorded such priority. The 
CBOE proposes to amend CBOE Rule 8.85(b)(iii) to require DPMs to accord 
priority only to public customer orders.\3\
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    \3\ According to the CBOE, it proposes to use its Retail 
Automatic Execution System (RAES) Rule 6.8 to define those orders to 
which its DPMs must give priority. Currently, CBOE Rule 6.8(b)(ii) 
defines orders that are not eligible for execution in RAES as those 
in which a member, non-member participant in a joint venture with a 
member or any non-member broker-dealer has an interest. Accordingly, 
the CBOE proposes to exclude these orders from a DPM's obligation to 
accord priority. Telephone call among Steve Youhn, CBOE, Kelly 
Riley, Senior Special Counsel, Division of Market Regulation, 
Commission, and Jennifer Lewis, Attorney, Division of Market 
Regulation, Commission, on November 21, 2001.
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    In the last few years, a number of systemic changes have occurred 
in the Exchange marketplace that have caused an increasing number of 
orders to be left for representation by DPMs. Changing economics have 
caused a decline in the number of independent floor brokers on the 
Exchange who formerly represented many orders in trading crowds. At the 
same time, the Exchange converted its equity option trading crowds that 
had been traditional competing market-maker trading crowds. As a result 
of these occurrences, a large percentage of all order that are traded 
in a particular trading crowd are first routed to the crowd Public 
Automated Routing (``PAR'') terminal. Because DPMs must be present at 
all times in their particular trading location and because there is 
generally not an independent crowd

[[Page 63084]]

broker in any particular location, it has fallen to the DPM to staff 
the PAR terminals and to represent the orders routed to the PAR 
terminal. Generally, the DPM does not charge for this brokerage service 
and thus, receives no direct benefit from performing this function. The 
CBOE does not believe it is appropriate or even preferable for the 
marketplace for the DPM to be denied the opportunity to compete to 
trade against so many orders merely because it is performing a service 
that benefits the Exchange generally.
    The CBOE believes that without the proposed amendment, it will 
become increasingly difficult for DPMs to compete against non-DPMs in 
the trading crowd. As the percentage of orders routed to the PAR 
terminal grows, the incentives to assume the affirmative obligations 
and expenses in managing a DPM operation decrease. The Exchange 
believes that the proposed rule change is justified in light of the 
particular responsibilities, burdens, and costs borne by DPMs compared 
to other market participants. DPMs have more market making 
responsibilities than non-DPMs, higher capital requirements, and other 
unique costs, including costs associated with staffing the brokerage 
function, the quote updating functions, and marketing functions.
    The Exchange offers the following example to help illustrate the 
nature of the concern. Assume a particular DPM has an order for a 
broker-dealer that has been routed to the crowd PAR terminal. The 
broker-dealer is seeking to buy 30 contracts of XYZ at a limit of $3 at 
a time when the market is 3 (bid)--3\1/4\ 4 (offer). Now, assume a 
broker-dealer walks into the crowd to sell 100 contracts of XYZ at $3. 
The DPM may represent the broker-dealer order and compete against other 
non-DPMs to trade against that 100 contract order. The DPM, however, 
must accord priority to that broker-dealer order and cannot compete to 
trade against that order. If the broker-dealer order and the other 
market-makers determine to trade all of the 100 contracts, the DPM will 
have no change to participate in the trade. If the DPM did not have to 
accord priority to the broker-dealer order, the DPM would be able to 
compete equally with the other market participants and assert is 
participation right if the trade occurred at the DPM's previously 
established principal bid or offer.
    The Exchange believes that the proposal will require DPMs to accord 
priority to those orders for public customers that they represent as 
agent over the DPM's principal transactions. Moreover, in accordance 
with the proposed rule change, the CBOE represents that DPMs will have 
the option to trade other non-public customer orders that they 
represent ahead of their own interest in a particular trade.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with, and furthers the objectives of, section 6(b) of the Act,\4\ in 
general, and furthers the objectives of section 6(b)(5) of the Act,\5\ 
in particular, because it is designated to remove impediments to a free 
and open market and to protect investors and the public interest.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 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 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 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-00-42 and should 
be submitted by December 26, 2001.

    For the Commission, by the Division of Makert Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29931 Filed 12-3-01; 8:45 am]
BILLING CODE 8010-01-M