[Federal Register Volume 67, Number 29 (Tuesday, February 12, 2002)]
[Notices]
[Pages 6556-6558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3295]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45394; File No. SR-CBOE-2001-64]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange Inc. Relating to AutoQuote 
Parameters

February 5, 2002.
    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 December 17, 2001, 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 8.7 regarding AutoQuote 
parameters. The text of the proposed rule change is set forth below. 
Additions are in italics.
Chapter VIII: Market-Makers, Trading Crowds and Modified Trading 
Systems
Section A: Market-Makers
Rule 8.7  Obligations of Market Makers
    (a)-(c) No change.
    * * * Interpretations and Policies:
    .01-.06  No change.
    .07  (a) Market-Makers are expected to participate in and support 
Exchange-sponsored automated programs, or approved equivalents, 
including but not limited to the Retail Automatic Execution System and 
AutoQuote. AutoQuote is the Exchange's electronic quotation system that 
automatically monitors and updates market quotations using a 
mathematical formula measuring certain characteristics of the option 
and the underlying interest. The formula for generating automatically 
updated market quotations requires the input of certain components 
including an option pricing calculation model, volatility, interest 
rate, dividend, and the measure used to represent the value of the 
underlying.
    (b) For those classes in which a DPM, LMM or SMM has been 
appointed, the responsibility to determine a formula for generating 
automatically updated market quotations is done by either the DPM 
pursuant to Rule 8.85(a)(x) or the LMM or SMM pursuant to Rule 8.15. 
The DPM, LMM or SMM may choose to use either the Exchange's AutoQuote 
system or a proprietary automated quotation updating systems to monitor 
and update market quotations. For those option classes in which a DPM, 
LMM, or SMM has not been appointed, the appropriate Exchange Committee 
may appoint one or more market-makers in good standing with an 
appointment in the particular option class to determine a formula for 
generating automatically updated market quotations for a particular 
period of time using the Exchange's AutoQuote system or a proprietary 
automated quotation updating system.
    (c) For those option classes in which a DPM, LMM, SMM, or appointed 
market-maker do not have the responsibility set forth in paragraph (b) 
above, the components in the formula used in each trading crowd to 
generate automatically updated market quotations shall be as agreed 
upon by the respective trading crowds. For those classes in which a 
DPM, LMM, or SMM, or a market-maker in good standing has been appointed 
the responsibility to determine a formula for generating automatically 
updated market quotations, the DPM, LMM, SMM or appointed market-maker 
may, but is not required to, consult with and/or agree with members of 
the trading crowd in setting the components of the formula, but the 
members of the trading crowd are not required to provide input in these 
decisions, and in all instances, the DPM, LMM, SSM, or appointed 
market-maker has the responsibility to make the final determination as 
to the components. The provisions of this Interpretation .07 shall also 
apply to the use of automated quotation updating systems to generate 
indicative prices that are indications of interest and not firm quotes.

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 is submitting the proposed change to Interpretation and 
Policy .07 to CBOE Rule 8.7 pursuant to subparagraph IV.B.j of the 
Commission's September 11, 2000 Order,\3\ which requires in part that 
certain options exchanges, including the CBOE, adopt new, or amend 
existing, rules to make express any practice or procedure ``whereby 
market makers trading any particular option class determine by 
agreement the spreads or option prices at which they will trade any 
option class. * * *'' The proposed amendment to Interpretation and 
Policy .07 to CBOE Rule 8.7 would permit market makers to coordinate in 
setting the components of the formula used by an automated quotation 
updating system, or Autoquote.\4\
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    \3\ See Order Instituting Public Administrative Proceedings 
Pursuant to section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. Securities Exchange 
Act Release No. 43268 (September 11, 2000).
    \4\ For purposes of this filing and the proposed interpretation, 
the term Autoquote is used to refer to both the Exchange's own 
automatic quotation system that is offered to trading crowds to 
generate quotes and to proprietary automated quotation updating 
systems that are used by trading crowds, DPMs, LMMs, SMMs, or 
appointed market-makers to generate quotes in lieu of or in addition 
to the Exchange's own Autoquote system.
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    Autoquote is the Exchange's electronic quotation system that 
automatically monitors and updates market quotations using a 
mathematical formula measuring certain characteristics of the option 
and the underlying interest. The formula for generating automatically 
updated market quotations requires the selection and input of the 
following components or variables: An option pricing calculation model, 
volatility, interest rate, dividend, and the measure used to represent 
the value of the underlying. These Autoquote components may need to be 
changed during the course of a trading day.
    Autoquote is relied upon by all trading crowds to provide 
automatically updated quotations in options series traded by the crowd. 
Autoquote provides a means to update the quotes for the tens of 
thousands of series the Exchange lists.\5\ The Commission has 
recognized ``the importance and

[[Page 6557]]

efficiencies of automated systems'' and that ``the Exchange must have 
the authority to require adequate levels of market maker participation 
if these systems are going to function efficiently and on a continuous 
basis.''\6\
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    \5\ Although Autoquote is necessary, individual market-makers 
can and do manually improve the quote themselves in order to gain a 
larger share of orders than competing market-makers. In these 
instances, the manual quote overrides the Autoquote for that 
particular series.
    \6\ See Securities Exchange Act Release No. 25787 (June 6, 
1988), 53 FR 22083, at 22084 (June 13, 1988).
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    The CBOE believes that automatic updating of quotes enabled by 
Autoquote is the bedrock for many of the Exchange's market maker 
obligations. For example, pursuant to CBOE Rule 8.51, the Exchange 
trading crowd as a whole is defined as the ``responsible broker or 
dealer'' for purposes of the Firm Quote Rule, and thus is obligated to 
execute a certain number of contracts at the disseminated quote. 
Accordingly, the CBOE believes that it is very important that the 
disseminated quote is updated and accurate. Similarly, market makers 
would not participate in the Exchange's Retail Automatic Execution 
System (``RAES'') if they did not have confidence in the accuracy of 
the price of orders executed on RAES.
    The proposed amendment to Interpretation and Policy .07 to CBOE 
Rule 8.7 would set forth a more thorough description of Autoquote. The 
proposed rule change also would identify who has responsibility under 
Exchange rules to determine a formula for generating automatically 
updated market quotations. For classes of options in which a DPM is 
appointed, the DPM would have primary responsibility to determine the 
formula, which includes determining the components or variables used in 
the Autoquote formula.\7\ For classes of options in which an LMM or SMM 
is appointed, such as the S&P 100 option class (``OEX''), the LMM or 
SMM would have primary responsibility to determine the formula for 
generating automatically updated market quotations.\8\ For classes of 
options in which a DPM, LMM, or SMM has not been appointed, the 
appropriate Exchange Committee would be permitted to appoint one or 
more market makers in good standing with an appointment in the 
particular option class (``Appointed Market-Makers'') to determine a 
formula for generating automatically updated market quotations, using 
the Exchange's Autoquote system or a proprietary automated quotation 
updating system.
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    \7\ See CBOE Rule 8.85(a)(x).
    \8\ On December 17, 2001, the CBOE filed SR-CBOE-2001-63 which 
amends CBOE Rule 8.15 to make explicit in the rule that the 
appropriate Market Performance Committee (``MPC'') may appoint LMMs 
and SMMs to determine a formula for generating automatically updated 
market quotations and use the Exchange's AutoQuote system or a 
proprietary automated quotation updating system to update market 
quotations during the trading day in an options class for which a 
DPM has not been appointed.
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    Although DPMs, LMMs, SMMs, and Appointed Market-Makers would have 
the responsibility for determining the formula for generating 
automatically updated market quotations, the proposed amendment to 
Interpretation and Policy .07 expressly would provide that the DPM, 
LMM, SMM, or Appointed Market-Maker may, but is not required to, 
consult with and/or agree with other market makers in the trading crowd 
in setting the components or variables of the formula. Conversely, the 
proposal provides that to the extent a DPM, LMM, SMM, or Appointed 
Market-Maker determines to consult with and/or agree with the market 
makers in the trading crowd in setting the components of the Autoquote 
formula, members of the trading crowd would not be required to provide 
input to the DPM, LMM, SMM, or Appointed Market-Maker about these 
decisions.
    For classes of options in which a DPM, LMM, SMM or Appointed 
Market-Maker does not have the responsibility to determine a formula 
for generating automatically updated market quotations, the market 
makers would be permitted to coordinate and agree upon the variables 
for the Autoquote formula. In some trading crowds, one or a few market 
makers may take responsibility (with the crowd's approval) for updating 
the Autoquote variables without seeking input on a continual basis. The 
CBOE believes that such market maker coordination is necessary and 
appropriate because an Autoquote system is centralized and applicable 
to all market participants. Thus, the obligations resulting from the 
quotes generated by Autoquote, such as the firm quote obligation, are 
imposed on the crowd as a whole.\9\ Moreover, although Autoquote is 
essential to ensure that quotes are updated on the numerous series 
traded by the Exchange on a timely basis, individual market makers can 
and do compete among each other to gain a larger share of orders by 
verbalizing quotes that improve the Autoquote generated quotes. These 
verbalized quotes by market makers override the Autoquote generated 
quotes for the particular series that is the subject of the verbalized 
quote.
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    \9\ CBOE has always used, and the applicable CBOE rules 
envision, a centralized autoquote system. Although it may be 
technologically feasible at some point in the future to have a 
system that would permit each individual market-maker to have his or 
her own automatic quote updating capability (and although CBOE may 
eventually develop such a model), CBOE believes that its centralized 
autoquote system is essential to preserving CBOE's current model of 
a floor-based, open-outcry market that includes joint crowd 
obligations pursuant to rules that have been approved by the 
Commission.
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    Finally, the amendment to Interpretation .07 also would provide 
that the provisions described above and set forth in the proposed 
amendment to Interpretation .07 would also apply to the use of 
automated quotation updating systems that generate indicative prices 
that are indications of interest and not firm quotes.\10\
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    \10\ Interpretation and Policy .10 to CBOE Rule 8.7 provides 
that ``[m]arket-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.''
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 5(b) of the Act \11\ in general and furthers the 
objectives of Section 6(b)(5) \12\ in particular in that it is designed 
to promote just and equitable principles of trade, remove impediments 
to a free and open market and a national market system, and protect 
investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change is 
procompetitive, because it is necessary to provide for a fair and 
orderly market in the thousands of option series traded on the 
Exchange. Accordingly, the Exchange believes the limited joint activity 
described in this rule proposal is justified by and furthers the 
objectives of section 11A(a)(1)(C)(ii) of the Act \13\ by assuring fair 
competition among markets. The proposed rule also is consistent with 
and furthers the objectives of section 6(b)(5) of the Act \14\ in that 
it is designed to remove impediments to a free and open market and 
protecting investors and the public interest.
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    \13\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \14\ 15 U.S.C. 78f(b)(5).
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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.

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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 CBOE 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 filings will also be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to File No. SR-CBOE-2001-64 and 
should be submitted by March 5, 2002.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3295 Filed 2-11-02; 8:45 am]
BILLING CODE 8010-01-P