[Federal Register Volume 67, Number 8 (Friday, January 11, 2002)]
[Notices]
[Pages 1526-1527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-761]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45244; File No. SR-CBOE-00-56]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 1 to Proposed 
Rule Change, To Allow Certain Orders Entered Through the Exchange's 
Order Routing System To Automatically Trade Against Orders in the 
Exchange's Customer Limit Order Book

January 7, 2002.

I. Introduction

    On November 13, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to allow certain orders entered 
through the Exchange's Order Routing System (``ORS'') to automatically 
trade against orders in the Exchange's customer limit order book. The 
proposed rule change was published in the Federal Register on June 4, 
2001.\3\ The Commission received one letter and one e-mail, submitted 
by the same commenter, regarding the proposed rule change.\4\ On 
October 1, 2001, the Exchange filed Amendment No. 1 to the proposed 
rule change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 44356 (May 25, 2001), 66 
FR 30033 (June 4, 2001) (``Notice'').
    \4\ See Letter to the Secretary, Commission, dated June 3, 2001, 
and e-mail submitted to the Division of Market Regulation, 
Commission, dated June 4, 2001, from Mike Ianni (``Ianni Comments'')
    \5\ See Letter from Angelo Evangelou, Attorney, CBOE, to Andrew 
Shipe, Attorney, Division of Market Regulation, Commission, dated 
September 28, 2001 (``Amendment No. 1''). In Amendment No. 1, the 
CBOE clarified that the authority to exempt an option class from the 
provisions of the proposed rule change during unusual market 
conditions could be delegated by the Chairman of the appropriate 
Floor Procedure Committee only to another member of that Committee.
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    This order approves the proposed rule change, accelerates approval 
of Amendment No. 1, and solicits comments from interested persons on 
the amendment.

II. Description of the Proposed Rule Change

    The CBOE's Automated Book Priority System (``ABP'') allows an order 
entered into the Exchange's Retail Automatic Execution System 
(``RAES'') to trade directly with an order on the Exchange's customer 
limit order book when the best bid (offer) on the Exchange's book is 
equal to the prevailing market bid (offer).\6\ However, orders entered 
into the RAES system are subject to size limitations. The Exchange now 
proposes to expand the application of the ABP system to allow booked 
orders to trade directly with incoming marketable public customer 
orders routed through ORS which, because of their larger size, are 
ineligible for RAES.\7\
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    \6\ See Securities Exchange Act Release No. 41995 (October 8, 
1999), 64 FR 56547 (October 20, 1999).
    \7\ CBOE represents that the term ``marketable public customer 
order'' means a market or marketable limit order that is not for an 
account in which a member, non-member participant in a joint-venture 
with a member, or any non-member broker-dealer (including foreign 
broker-dealer) has an interest. E-mail from Angelo Evangelou, 
Attorney, CBOE, to Andrew Shipe, Attorney, Division, Commission, 
dated December 26, 2001.
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    Currently, when a non-RAES eligible order is entered into the 
Exchange's ORS and the best bid (offer on the Exchange's book is equal 
to the prevailing market bid (offer), the order is routed to a Floor 
Broker's terminal, a work station in the crowd, or the order-sending 
firm's booth. CBOE submits that this helps ensure that such orders are 
handled and executed in a manner consistent with CBOE Rule 6.45, which 
provides that bids or offers displayed on the customer limit order book 
are entitled to priority over other bids or offers at the same price. 
However, CBOE states that once an order is so routed, it becomes 
subject to market risk, as there may be some delay between the time the 
order is rerouted and the time it is actually filled in open outcry. 
CBOE believes that in times of extreme market volatility this delay 
could have a significant effect on the price at which the order is 
executed.
    Under the proposal, an incoming marketable public customer ORS 
order would be automatically executed against a customer limit order in 
the book that represents or equals the prevailing best bid (offer) up 
to the size of that booked order. Any remaining balance of the ORS 
order would then be instantly rerouted through the ORS as if it were a 
new order, which could, among other things, include handling under 
CBOE's RAES Rule (Rule 6.8). The proposed rule change also provides 
that no automatic execution would take place at a price inferior to the 
current best bid (offer) in any other market.
    The proposed change would be contained in proposed new Rule 6.8.B. 
The new rule would further provide that the appropriate Floor Procedure 
Committee (``FPC'') could determine

[[Page 1527]]

which option classes would be subject to the rule. Furthermore, the 
proposed rule would allow two Floor Officials, the FPC Chairman, or the 
Chairman's designee to exempt an option class or classes from the 
proposed rule's requirements if warranted by unusual market 
conditions.\8\
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    \8\ According to the Exchange, unusual market conditions may 
include drastic movement in the security underlying an option or new 
pending about the issuer of the underlying security. Telephone 
conversation between Angelo Evangelou, Counsel, CBOE, and Andrew 
Shipe, Attorney, Division, Commission, on September 5, 2001. See 
also Securities Exchange Act Release No. 43829 (January 10, 2001), 
66 FR 4877, 4878, n.8 (January 18, 2001).
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III. Summary of Comments

    The one commenter who expressed views on the proposed rule change 
generally supported the proposal. However, the commenter expressed 
concern that the proposal would not be implemented in all classes of 
CBOE-listed options, but only as determined by the appropriate FPC. The 
commenter submitted that ABP should be engaged for all classes of 
options, rather than implemented on a selective basis.\9\
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    \9\ See Ianni Comments.
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IV. Discussion

    The proposal would extend CBOE's ABP system to marketable public 
customer orders entered into the Exchange's ORS, on a class-by-class 
basis. The Commission believes that this expansion of the ABP system 
should benefit customers using the ORS system, as well as customer 
whose orders are residing in the Exchange's book, because these orders 
would be subject to quicker executions. The Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\10\ In particular, the Commission believes that 
the proposal is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
to protect investors and the public interest.
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    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78(c)(f).
    \11\ 15 U.S.C. 78f(b)(5).
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V. Amendment No. 1

    The Commission further finds good cause to approve Amendment No. 1 
to the proposed rule change prior to the thirtieth day after the date 
of publication of notice thereof in the Federal Register. In Amendment 
No. 1, the Exchange clarified that the Chairman of the appropriate FPC 
may designate his authority to exempt an option class from the 
provisions of paragraph (a) of the proposed rule during unusual market 
condition only to another member of the FPC. The Commission notes that 
Amendment No. 1 merely clarified who is eligible to be the ``Chairman's 
designee'' for purposes of the proposed rule. Accordingly, the 
Commission believes that there is good cause, consistent with Sections 
6(b)(5) and 19(b) of the Act.\12\ to approve Amendment No. 1 on an 
accelerated basis.
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    \12\ 15 U.S.C. 78f(b)(5) and 78s(b).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 at the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CBOE-00-56 and should be 
submitted by February 1, 2002.

VII. Conclusion

    For the foregoing reasons, the Commission finds that CBOE's 
proposal to amend its rules to allow for certain orders entered through 
the Exchange's Order Routing System to automatically trade against 
orders in the Exchange's customer limit order book, as amended, is 
consistent with the requirements of the Act and rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-00-56), as amended, is 
approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-761 Filed 1-10-02; 8:45 am]
BILLING CODE 8010-01-M