[Federal Register Volume 67, Number 46 (Friday, March 8, 2002)]
[Notices]
[Pages 10778-10783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5549]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45490; File No. SR-CBOE-2001-70]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Dissemination of Options Quotations With Size

March 1, 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 28, 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. On January 14, February 27, and March 1, 2002, 
respectively, the Exchange submitted Amendment Nos. 1,\3\ 2,\4\ and

[[Page 10779]]

3 \5\ to the proposal. 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.
    \3\ See Letter from Edward J. Joyce, CBOE, to Deborah Flynn, 
SEC, dated January 11, 2002 (``Amendment No. 1''). In Amendment No. 
1, the exchange submitted additional information clarifying the 
intended operation of the proposal and eliminated a provision 
regarding the maximum number of contracts eligible for automatic 
execution.
    \4\ See Letter from Steve Youhn, CBOE, to Deborah Flynn, SEC, 
dated February 13, 2002 (``Amendment No. 2''). In Amendment No. 2, 
the Exchange, among other things, withdrew from the filing that 
section pertaining to the execution of Exchange's Retail Automatic 
Execution System (``RAES'') orders against manual quotes. The 
Exchange filed a new proposed rule change to address the execution 
of RAES orders against manual quotes (SR-CBOE-2002-07).
    \5\ See Letter from Steve Youhn, CBOE, to Deborah Flynn, SEC, 
dated February 28, 2002 (``Amendment No. 3''). In Amendment No. 3, 
the Exchange amended the proposed rule text of Proposed CBOE Rule 
6.8.09(a)(1) to clarify the proposed operation of the 30-second re-
route period. In addition, Amendment No. 3 eliminates references to 
``real'' and ``actual size'' in the purpose section of the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend CBOE Rules 6.8 and 8.51 to 
accommodate the introduction of an options quotation with size 
(``quotes with size'' or ``QWS'') system with an automatic 
decrementation feature (``AutoDec''). Below is the text of the proposed 
rule change. Additions are italicized and deletions are bracketed.
* * * * *

CBOE Rule 6.8: RAES Operations

    (b) Definitions
    (i)-(iii) no change
    (iv) The term ``options quotations with size'' refers to any series 
of options for which the Exchange disseminates a quotation size that is 
able to be decremented to reflect previous executions.
    (c)(v) The appropriate FPC shall determine the size of orders 
eligible for entry into RAES. Except for classes in which the Exchange 
disseminates options quotations with size, the eligible order size may 
not be for more than one hundred contracts. For classes in which the 
Exchange disseminates options quotations with size, the eligible order 
size may be set as the disseminated size. [Eligible orders must be for 
one hundred or fewer contracts on series placed on the system.] 
Further, [T]the appropriate FPC, in its discretion, may determine to 
restrict the size and kind of eligible orders, including but not 
limited to, lowering contract limits on particular option issues. 
Announcements concerning the size and kind of eligible orders will be 
made promptly as these are adjusted. The appropriate FPC will have 
discretion to place on the system such series in classes of options 
subject to its jurisdiction as it determines is appropriate.

Interpretations and Policies

    .09
    (a)(1) If the Exchange disseminates options quotations with size in 
a particular series, the number of contracts that may receive automatic 
execution at the disseminated price may not exceed the disseminated 
size in that series. Automatic executions will decrement the 
disseminated size by the amount of the automatic execution. When the 
number of contracts receiving automatic execution at a particular price 
exhausts the accompanying disseminated size for that series, subsequent 
orders that are otherwise eligible for RAES will not execute 
automatically for a period not to exceed 30-seconds (``re-route 
period'') and instead shall be automatically rerouted to PAR, BART or 
Live Ammo. When an incoming order is within the eligible order size yet 
is for a greater number of contracts than the disseminated size, that 
order will receive a partial automatic execution in an amount up to the 
disseminated size. The balance of the order and any subsequent orders 
otherwise eligible for RAES that are entered during the reroute period 
will route automatically to PAR, BART, or Live Ammo.
    (2) Orders Rerouted from Live Ammo to RAES. In the event any orders 
previously routed to Live Ammo as described in subparagraph (a)(1) 
above are rerouted to RAES (``rerouted orders'') pursuant to Rule 
7.4(g), all rerouted orders will receive automatic execution at the 
disseminated price even if the cumulative size of these rerouted orders 
exceeds the disseminated size. In addition, any orders rerouted to RAES 
pursuant to Rule 7.4(g) will maintain priority over subsequently-
received RAES orders.
    (b) If the Exchange disseminates options quotations with size in a 
particular class, the entity responsible for determining a formula for 
generating automatically updated market quotations for that class 
pursuant to Rule 8.7(b) and (c) shall also have responsibility for 
determining the size of the undecremented disseminated quote for that 
same class. For those classes in which a DPM, LMM, or SMM, or a market-
maker in good standing has been appointed the responsibility to 
determine the size of the disseminated quote, 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 determining the size of the 
disseminated quote. The members of the trading crowd are not required 
to provide input in these decisions, and in all instances, the DPM, 
LMM, SMM, or appointed market-maker has the responsibility to make the 
final determination as to the size of the undecremented disseminated 
quote. For those classes in which a DPM, LMM, SMM, or appointed market-
maker does not have the responsibility set forth in Rule 8.7(b), the 
trading crowd shall determine the size of the undecremented 
disseminated quote.

Rule 8.51. 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] disseminates[d] to vendors. In the event the Exchange has 
not [published] disseminated 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 will also 
separately publish 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 the 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 or disseminates for that particular 
series.
    (b) For those series in which the Exchange disseminates options 
quotations with size (as defined in Rule 6.8(b)(iv), it may authorize 
the use of a replenishment timer. The replenishment timer, which shall 
be configurable by class by the DPM, is a feature that automatically 
increases the size of the disseminated quote for a particular series to 
the original Autoquote (Exchange or proprietary) size parameter after a 
pre-established time-period during which no automatic executions at the 
disseminated quote have occurred.
* * * * *

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

[[Page 10780]]

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

Introduction

    Exchange Rule 8.51, Firm Disseminated Market Quotes, codifies 
CBOE's firm quote obligations. Section (c) of that rule, Firm Quote 
Size, provides that:

    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).

Currently, the Exchange's quotation systems are unable to decrement the 
disseminated size to reflect previous executions, except in the case of 
orders in the book. For this reason, the Exchange has complied with the 
Commission's Quote Rule \6\ by publishing on its website the firm quote 
size for each series and along with the bid-ask quotes disseminated to 
quotation vendors.
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    \6\ 17 CFR 240.11Ac1-1.
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    Even though the Exchange is ``firm'' for the size published on its 
website, this size often is not representative of the depth of 
liquidity a trading crowd is willing to provide in a particular series. 
Most trading crowds are willing to provide deeper markets, however, the 
systems limitations described above make such an endeavor impractical. 
The publication of a static size figure, which also can cause 
artificial liquidity, puts the Exchange at a competitive disadvantage 
in competing for orders of a size greater than the Exchange's published 
size.
    To address this limitation, the Exchange proposes to implement an 
options quotation with size system. When operational, the QWS system 
would have an AutoDec feature that enables the Exchange to disseminate 
``dynamic'' size, i.e., a size that reflects previous executions and a 
size for which the Exchange is firm pursuant to Exchange Rule 8.51. The 
ability to decrement size would enable the Exchange to disseminate a 
real size that is a much more accurate barometer of the liquidity 
available in a particular series. The Exchange believes that this 
systems improvement would significantly benefit investors in their 
order routing decisions by providing them with a better indication of 
the depth of liquidity available in a series. Accordingly, the Exchange 
believes that the adoption of a QWS system would enable it to compete 
more effectively for larger-sized orders. Finally, as discussed in 
greater detail below, the Exchange notes that this proposal is 
substantially similar to how the International Securities Exchange's 
(``ISE'') quote size provisions operate.

Description

    For those series in which the exchange disseminates options 
quotations with size, the QWS system would automatically decrement all 
executions for each individual series calculated by Autoquote \7\ that 
execute automatically. For example, if the Exchange disseminates a size 
of 100 contracts, the trading crowd would be firm for 100 non-broker-
dealer contracts executed automatically or via open outcry at the 
disseminated price, until that size was exhausted or until the quote 
was refreshed. The Exchange notes that in order to preserve the use of 
RAES as an automatic execution system for smaller retail orders, the 
appropriate Floor Procedure Committee (``FPC'') would retain its 
authority to establish the RAES size for a particular series at a 
number less than the disseminated size.\8\ For classes in which the 
Exchange does not disseminate options quotations with size, current 
CBOE Rule 6.8(c)(v) remains in effect, as discussed in the section 
``RAES Operations.'' \9\
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    \7\ For purposes of this rule filing, Autoquote shall refer to 
any automated quotation updating system, whether Exchange-owned or 
proprietary.
    \8\ The Exchange originally proposed to allow the appropriate 
FPC to retain its current authority to limit the number of contracts 
eligible for automatic execution to a number less than the 
disseminated size. In Amendment No. 1, the Exchange proposed to 
remove this discretion and clarified that the RAES size would equal 
the disseminated size. In Amendment No. 2, the Exchange once again 
proposed to allow the appropriate FPC to retain its authority to 
limit the RAES size to a number less than the disseminated size.
    \9\ CBOE Rule 6.8(c)(v) provides that the appropriate FPC shall 
determine the size of orders eligible for entry into RAES. The 
eligible order size for non-QWS series must be 100 contracts or 
less.
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    While the disseminated size would reflect the number of contracts 
that may be executed automatically or via open outcry at a particular 
price, trades executed in open outcry would not cause the disseminated 
size to decrement automatically. In this respect, the Exchange notes 
that in some instances it would be firm for executions that in the 
aggregate sum up to more than its disseminated size. The number of 
contracts in a particular series that may receive automatic execution 
at the disseminated price, however, may not exceed the disseminated 
size.\10\ Consistent with the current provisions of CBOE Rule 6.8, 
orders eligible for electronic execution would not be executed 
automatically at prices inferior to the national best bid or offer as 
identified by CBOE.
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    \10\ See Proposed CBOE Rule 6.8.09(a).
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    There are several reasons why trades executed in open outcry would 
not decrement displayed size. First, decrementation from the floor 
requires manual input, which can be time consuming and resource 
intensive, especially in very active markets. In contrast, RAES would 
be programmed to automatically decrement size upon executions. Second, 
the need for decrementation to prevent unnecessary liquidity exposure 
is more urgent in an auto-ex situation. When an order hits RAES, there 
is virtually no time to adjust quotes before another order can arrive 
through RAES. In contrast, all market makers and the Designated Primary 
Market Maker (``DPM'') are immediately aware of an open outcry 
execution and are thus able to adjust their quotes accordingly. Even if 
a new order arrives on the floor immediately after an execution, market 
makers have the ability to adjust their quotes because a new market is 
created by the previous execution.\11\ Finally, the lack of 
decrementation after an open outcry execution works to the advantage of 
public customers. The lack of decrementation means that the displayed 
size remains higher than it would have been if the open outcry trade 
resulted in decrementation. Thus, public customers would have a larger 
firm quote size to execute against.
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    \11\ In such a situation, the new quote would be input into CBOE 
quotation systems for dissemination to the public.
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    If an incoming electronic order exceeds the disseminated size, that 
order would receive a partial automatic execution for up to the 
disseminated size at the disseminated price. The balance of the order 
would be automatically rerouted to the Exchange's Public Automated 
Routing System (``PAR''), the Exchange's Booth Automated Routing 
Terminal (``BART''),

[[Page 10781]]

or Live Ammo \12\ and thus may receive a dual-price execution.\13\ This 
treatment is consistent with Exchange Rule 8.51(d), the Thirty Seconds 
Rule, which requires the crowd within 30 seconds of receiving an order 
for a size greater than the quotation size to execute the entire order 
or to execute that portion of the order equal to the disseminated size 
and revise its price quote. The Exchange notes that at some future 
point it may develop the systems capability to automatically execute 
these orders at dual prices.
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    \12\ The Live Ammo electronic screen displays market orders or 
limit orders that improve the market. See CBOE Rule 7.4(g).
    \13\ The Exchange notes that orders would only be routed to BART 
if a firm so chooses.
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The 30-Second Reroute Period

    When the disseminated size is decremented to zero by automatic 
executions, for a period not to exceed 30-seconds (``reroute period''), 
all subsequent orders in that series that are otherwise eligible for 
automatic execution would be automatically rerouted either to PAR, BART 
or Live Ammo.\14\ Upon expiration of the reroute period timer, new 
electronic orders would again be eligible for automatic execution up to 
the refreshed disseminated size.\15\ See Proposed CBOE Rule 
6.8.09(a)(1). The duration of the reroute period would be configurable 
by the DPM on a class basis and may not exceed 30-seconds. The DPM may 
manually override the reroute timer by submitting a new quote prior to 
the expiration of the reroute period. For example, if the reroute 
period timer is established at 15-seconds, the DPM may manually send a 
new quote at any time prior to 15-seconds. When this is done, orders 
may once again be eligible for automatic execution at the refreshed 
price.\16\
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    \14\ The appropriate FPC shall determine by class the location 
to which to route those RAES orders that are submitted during the 
reroute period. The Exchange notes that orders would only be routed 
to BART if a firm so chooses. Absent specific instructions, orders 
would reroute to either PAR or Live Ammo.
    \15\ During the reroute period, the Exchange would disseminate a 
size of ``1'' (with the same price) until the quote has been 
refreshed by the DPM.
    \16\ See Amendment No. 1, supra note , at p. 2.
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    The CBOE represents that the purpose of the reroute period is to 
provide the DPM with the opportunity to refresh the quote when the 
disseminated size has been exhausted, in conformity with the Quote 
Rule. Amendment No. 1 clarifies that orders received during the reroute 
period would not be held for the duration of the reroute period. 
Rather, as incoming electronic orders are received during the reroute 
period they would be routed upon receipt to PAR, BART or Live Ammo. 
Upon expiration of the reroute period, subsequent incoming orders that 
are eligible for automatic execution would once again be eligible to 
receive automatic execution at the refreshed price.\17\
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    \17\ See Amendment No. 1, supra note , at pp. 1-2 and Amendment 
No. 2, supra note , at p. 1.
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    The Exchange believes that DPMs would have strong incentives to 
establish reroute periods that last considerably less than thirty 
seconds for several reasons. First and foremost is for competitive 
reasons. During the reroute period, the Exchange would disseminate a 
size of ``1.'' Customers and firms that see the Exchange is firm for 
only one contract in this particular series may look elsewhere to send 
their options orders. This provides a strong incentive to DPMs to 
update their quotations as quickly as possible. Second, the Exchange 
notes that the appropriate FPC could require DPMs to establish the 
length of the reroute period to a maximum length of time that is less 
than thirty seconds. For example, the FPC could require that DPMs 
establish a reroute period that does not exceed fifteen seconds. In 
this instance, DPMs would have the ability to establish a reroute 
period that is less than fifteen seconds.\18\
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    \18\ Id. The Exchange notes that the DPM has the responsibility 
for establishing the duration of the reroute period for his classes. 
The appropriate FPC may however establish a ceiling on that 
duration.
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    The Exchange notes that the use of Live Ammo as a routing 
destination provides two main benefits. First, it provides an 
alternative to routing to PAR. In some instances, several orders may 
route to PAR terminals at approximately the same time. If traffic on 
PAR is heavy, the DPM would have the ability to route orders to Live 
Ammo. The CBOE believes that this should help to ensure that orders are 
addressed expeditiously. Second, the Live Ammo terminals feature a 
``Live Ammo to RAES'' switch that enables the DPM to automatically 
reroute orders back for automatic execution. If the DPM uses this 
function, all orders on Live Ammo would then immediately reroute for 
automatic execution, even if the cumulative size of these orders 
exceeds the disseminated size.\19\
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    \19\ Id. at p. 2.
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    Amendment No. 2 would detail in the proposed rule text that 
function of Live Ammo that allows a DPM to automatically reroute orders 
from Live Ammo to RAES for automatic execution, even if the cumulative 
size of these rerouted orders exceeds the disseminated size. In 
addition, CBOE has amended the rule text to provide that orders 
rerouted from Live Ammo to RAES would retain priority over subsequently 
received RAES orders. CBOE notes that this latter point was addressed 
by the Exchange in its Amendment No. 3 to SR-CBOE-98-27, which the 
Commission approved on February 2, 2000.\20\ Finally, for a more 
detailed description of Live Ammo in general, and the function known as 
``Live Ammo to RAES'' in particular, the Exchange identifies CBOE Rule 
7.4(g) and the aforementioned rule filing SR-CBOE-98-27 and the 
amendments thereto.\21\
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    \20\ See Securities Exchange Act Release No. 42379, 65 FR 6665 
(February 10, 2000).
    \21\ See Amendment No. 2, supra note
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RAES Operation

    As indicated above, the QWS system would enable the Exchange to 
display larger disseminated sizes, which benefits all customers. To 
facilitate the introduction of QWS, the Exchange would make a 
corresponding change to CBOE Rule 6.8(c)(v) regarding the maximum 
eligible order size for RAES orders. Currently, the maximum allowable 
RAES size is 100 contracts. The Exchange proposes to retain this upper 
limit, however, it would only apply to those series in which the 
Exchange does not disseminate options quotations with size (as defined 
in Proposed CBOE Rule 6.8(b)(iv)). For those series in which the 
Exchange disseminates options quotations with size, the eligible order 
size would be established by the appropriate FPC. To limit the maximum 
eligible order size to 100 contracts would destroy the purpose for 
which the QWS was developed: To have the ability to provide large 
quotation sizes against which electronic orders may automatically 
execute.

Determination of Disseminated Size

    The entity that has responsibility under Exchange Rules to 
determine a formula for generating automatically updated market 
quotations would also be responsible for determining the size of the 
undecremented disseminated quote. In most instances, this entity would 
either be the DPM, Lead Market-Maker (``LMM''), or Supplemental Market-
Maker (``SMM'') or Appointed Market-Maker (``Appointed Market-Maker'') 
for the class.\22\ While DPMs,

[[Page 10782]]

LMMs, SMMs, and Appointed Market-Makers have the responsibility to 
determine the size of the undecremented disseminated quote, the 
proposed amendment to Interpretation and Policy .09(c) of CBOE Rule 6.8 
expressly provides 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 determining the size of the 
undecremented disseminated quote.\23\ Conversely, the amendment 
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 determining the size of the undecremented disseminated 
quote, members of the trading crowd are not required to provide input 
to the DPM, LMM, SMM, or Appointed Market-Maker about these decisions. 
The Exchange believes that this type of consultation between trading 
crowd participants is entirely appropriate because the trading crowd is 
defined as the ``responsible broker or dealer'' for purposes of CBOE 
Rule 8.51. Because they collectively must honor the disseminated firm 
quote size, it is appropriate for them to discuss collectively the size 
of that guarantee.
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    \22\ For those classes in which a DPM, LMM, SMM, or Appointed 
Market-Maker does not have responsibility to determine a formula for 
generating automatically updated market quotations, the obligation 
to update quotes is imposed upon the trading crowd as a whole. See 
File No. SR-CBOE-2001-64, a proposal pending before the Commission, 
for a description of the Autoquote-setting mechanism.
    \23\ In those classes in which a DPM, LMM, SMM, or Appointed 
Market-Maker does not have responsibility to determine the Autoquote 
variables, the trading crowd as a whole shall determine the size of 
the undecremented disseminated quote.
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The Replenishment Timer

    Because of the preponderance of series for which each DPM is 
responsible for maintaining quotes, the Exchange intends to introduce a 
``replenishment timer'' to guard against the continued dissemination of 
``stale'' size values. The replenishment time, which is configurable by 
class by the DPM, is a feature that automatically increases the 
disseminated size for a particular series back to the original 
Autoquote volume parameter after a set time-period when no further 
decrementation has occurred.\24\ The Replenishment Timer is 
incorporated in proposed CBOE Rule 8.51(c)(2)(b).\25\
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    \24\ For example, assume the replenishment timer is set for 240-
seconds in a class with a disseminated size of 200 and that this 
particular series has been decremented to 40 contracts due to 
executions. In order to prevent the continued dissemination of 40-
contracts for an extended period, the replenishment timer would, 
after 240-seconds from the last execution, increase the disseminated 
size back to 200 contracts. The firm quote size would then be 200 
contracts.
    \25\ See Amendment No. 1, supra note, at p. 3.
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Customer Benefits

    For many reasons, CBOE believes that the proposed QWS system would 
act to increase liquidity and depth in its market and enhance its 
competitiveness with other options exchanges. QWS would reflect better 
the true state of liquidity being offered at the time by the crowd. It 
would enable market makers and DPMs to quote a larger size market 
because they would not be subject to repetitive executions at an 
aggregate size greater than the size of their firm quote. Currently, if 
a crowd is firm for 50 contracts, repetitive RAES executions can result 
in aggregate executions that total far greater than 50 contracts before 
the DPM has an opportunity to update quotations. This artificial 
liquidity exposure limits market makers and DPM willingness to 
establish a large firm quote size for customers. QWS should encourage 
DPMs and market makers to offer greater size guarantees and tighter 
markets because their liquidity exposure would be limited to the total 
size displayed. In addition, CBOE would be able to compete better 
against markets that display quotes with size, such as the ISE. 
Additionally, the QWS would act in a neutral manner to all order entry 
firms. The size displayed would be available for all firms. While a 
market participant may be able to avail itself of a displayed size and 
absorb all of the size before another market participant, every CBOE 
member has an equal opportunity to attempt to avail itself of a 
displayed size before it is decremented.
    Upon approval of this rule filing, the Exchange would gradually 
rollout the QWS functionality by series. It is the Exchange's hope that 
QWS would be active in its most active series. For those series in 
which the Exchange does not disseminate options quotations with size, 
the Exchange would continue to comply with the Commission's Quote Rule 
as it currently does (i.e., published by the Exchange on its website, 
see CBOE Rule 8.51(c)(2). For those series in which the Exchange does 
not disseminate options quotations with size, RAES would continue to 
operate as it does today (i.e., with a 100-contract limit, which the 
appropriate FPC can determine to lower for particular issues). CBOE 
Rule 6.8(v), as amended, clearly makes this distinction.\26\
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    \26\ See Amendment No. 2, supra note, at pp. 1-2.
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Similarity to ISE and Nasdaq

    Finally, the Exchange notes that this proposal is substantially 
similar to how the ISE quote size provisions operate. ISE grants 
automatic executions up to its disseminated size. Accordingly, if ISE 
disseminates 100 contracts in a particular series, any customer can 
receive an electronic execution for up to 100 contracts. CBOE's QWS 
system would operate in an identical manner. Therefore, if CBOE and ISE 
each disseminate a size of 100 contracts in the same series, customers 
eligible to submit orders through CBOE Rule 6.8 may be entitled to 
receive an automatic execution for up to 100 contracts through CBOE's 
QWS system just as they could receive an automatic execution for 100 
contracts through ISE.
    Similarly, the NASD adopted a rule that allowed market makers to 
quote their actual size and reduced the minimum quotation size to one 
unit of trading.\27\ The move to actual size, combined with the 
decrementation of a Nasdaq market maker's quote size after an automatic 
execution, enabled market makers ``more flexibility to manage risk'' 
and allowed them to reflect size in their quotations based on business 
and market factors instead of regulatory imposed minimums. The Exchange 
believes that its QWS proposal accomplishes a similar result. However, 
with QWS, CBOE would still guarantee a minimum level of liquidity upon 
the establishment of every new quote, but that minimum should reflect 
more accurately the amount of liquidity offered at the price.
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    \27\ Securities Exchange Act Release No. 40211 (July 15, 1998), 
63 FR 39322 (July 22, 1998).
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2. Statutory Basis
    This proposal would enable the Exchange to disseminate quote sizes 
that more accurately reflect the number of contracts for which the DPM 
and crowd stand ready to buy or sell at the disseminated size. The 
dissemination of quotes with size with AutoDec should aid investors in 
their routing decisions by providing them with more certainty regarding 
the depth of liquidity behind a price quote. For these reasons, 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.\28\ Specifically, the Exchange believes the proposed 
rule change is consistent with the section 6(b)(5) \29\ requirements 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative

[[Page 10783]]

acts and, in general, to protect investors and the public interest.
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    \28\ 15 U.S.C. 78(f)(b).
    \29\ 15 U.S.C. 78(f)(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 would impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. The Exchange believes that disseminating 
options quotations with size would enhance competition. The proposed 
change does provide for limited joint participation among competing 
CBOE market-makers in a trading crowd in certain circumstances (e.g., 
to determine the size of the disseminated quote). The Exchange believes 
this limited joint participation 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 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 in that it is designed to remove impediments to a free and 
open market, and to protect investors and the public interest.

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, 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-2001-70 and should be submitted by March 25, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-5549 Filed 3-7-02; 8:45 am]
BILLING CODE 8010-01-P