[Federal Register Volume 67, Number 52 (Monday, March 18, 2002)]
[Notices]
[Pages 12068-12069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6456]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45542; File No. SR-CBOE-2001-65]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange Inc. To Permit a Single 
Response From Market Makers to a Request To Execute a Large Order

March 12, 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 CBOE filed an amendment to the proposed rule change on March 6, 
2002.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Deborah Flynn, Assistant Director, Division of Market 
Regulation (``Division''), dated March 4, 2002 (``Amendment No. 
1''). Amendment No. 1 deletes a footnote from the original filing 
that stated that a member would be viewed as having requested a 
single bid or offer if the member expressed to a trading crowd that 
generally he or she expected a single bid or offer for any order of 
greater than the RAES order eligibility size, unless he or she 
requested otherwise in a specific circumstance.
---------------------------------------------------------------------------

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 to permit a single 
response from market makers to a request to execute a large order. 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-.10  No change.
    .11   The obligation of Market-Makers to make competitive markets 
under Rule 8.7 does not preclude members in a trading crowd from 
discussing a request for a market that is greater than the RAES order 
eligibility size for that option class, for the purpose of making a 
single bid (offer) based upon the aggregate of individual bids (offers) 
by members in the trading crowd, but only when the member representing 
the order asks for a single bid (offer). Whenever a single bid (offer) 
pursuant to this paragraph is made, such bid (offer) shall be a firm 
quote and each member of the trading crowd participating in the bid 
(offer) shall be obligated to fulfill his portion of the single bid 
(offer) at the single price.

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 rule change pursuant to 
subparagraph IV.B.j of the Commission's September 11, 2000 Order,\4\ 
which requires 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 * * * .'' Although market makers compete against 
each other and, when applicable, against the Designated Primary Market 
Maker (``DPM''), Lead Market Maker, or Supplemental Market Maker 
(``SMM''), the proposed new Interpretation and Policy .11 to CBOE Rule 
8.7 would expressly provide for a limited situation where the CBOE 
believes that market makers necessarily are required to coordinate with 
each other.\5\ Specifically, proposed Interpretation and Policy .11 to 
CBOE Rule 8.7 would permit market makers to coordinate in the limited 
situation where a member requests a single bid or offer from the 
trading crowd for an order that is greater in size than the Exchange's 
Retail Automatic Execution System (``RAES'') order eligibility size for 
that option class, as determined by the Exchange's appropriate Floor 
Procedure Committee.
---------------------------------------------------------------------------

    \4\ 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).
    \5\ As set forth in CBOE Rules 8.80 and 8.85, respectively, the 
term ``market-makers'' includes DPMs and each DPM is obligated to 
fulfill all of the obligations of a market-maker under CBOE rules, 
in addition to fulfilling the specific obligations of a DPM.
---------------------------------------------------------------------------

    When a request to buy or sell a large number of options is 
submitted to a trading crowd, the CBOE believes that it is usually the 
case that the customer on whose behalf the request is made wants to 
know promptly at what single price all of the options represented by 
the request could be bought or sold. In the exercise of his fiduciary 
duty, the member representing such a large order is permitted to 
request a jointly made single bid or offer to ensure that his

[[Page 12069]]

customer's order is completely filled at the best price. Without asking 
for such a joint response, the member would assume a risk that the 
market would move substantially as the member attempts to execute the 
whole order in pieces against individual market makers at different 
prices.\6\
---------------------------------------------------------------------------

    \6\ Without asking for a joint response, a member may not know 
until it is too late whether he will have satisfied the customer's 
entire order if he fills the order in pieces against individual 
market-makers at different prices. The CBOE believes that a member 
who does not ask for a joint response takes a risk that the market 
will move substantially as the member executes the order in parts 
against different market-makers at different prices against whom he 
must mark up different order tickets or against whom he must make 
separate inputs into his electronic trading unit.
---------------------------------------------------------------------------

    Proposed Interpretation and Policy .11 to CBOE Rule 8.7.11 would 
allow CBOE market makers to respond to a member's request for a quick 
and certain market. The proposed rule change would permit market makers 
jointly to discuss a request from a member for a single order that is 
greater in size than the RAES order eligibility size for that option 
class, in order to provide a single bid or offer, based upon the 
aggregate of individual bids or offers by members in the trading crowd. 
Such coordination would only be permitted in situations where the 
member representing the order requests a single bid or offer. When a 
single bid or offer made in response to a request results in the order 
being executed, the order will be apportioned among the market makers 
who participated in making the single bid or offer according to the 
number of contracts each market participant committed to trading, and 
each market maker shall be obligated to fulfill his portion of the 
single bid or offer at the single price.\7\
---------------------------------------------------------------------------

    \7\ The Exchange has submitted another proposed rule change (SR-
CBOE-2002-08) relating to allocation of trades, including trades 
pursuant to proposed Interpretation and Policy .11 to CBOE Rule 
8.7.11.
---------------------------------------------------------------------------

    The CBOE believes that proposed Interpretation and Policy .11 to 
CBOE Rule 8.7 would enhance competition among markets. CBOE's market 
makers must be able to respond to requests for a single large order 
from a member in the face of competition from other exchanges that have 
specialists who are better able to provide a single response to large 
bids and offers. Moreover, because proposed Interpretation and Policy 
8.7.11 would allow CBOE market makers to respond to a specific request, 
the CBOE believes it would enhance the ability of the Exchange to 
respond to requests for immediate executions at disseminated prices.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general and furthers the objectives 
of Section 6(b)(5) \9\ 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change, as amended, would provide for limited 
joint participation among competing CBOE market makers in a trading 
crowd in certain circumstances. The Exchange believes this limited 
joint participation is justified by the benefits to the marketplace 
from this proposal. According to the Exchange, the effect of this 
aggregate response proposal would be to allow the market maker trading 
crowds to compete more effectively for order flow with specialists from 
other options exchanges by providing enhanced opportunities for best 
execution of customer orders on the CBOE. As a result, 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 \10\ by assuring fair competition among markets. The Exchange 
believes that the proposed rule also is consistent with and furthers 
the objectives of Section 6(b)(5) of the Act \11\ in that it is 
designed to remove impediments to a free and open market and protecting 
investors and the public interest.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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, 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 
filings will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to the File 
No. SR-CBOE-2001-65 and should be submitted by April 8, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6456 Filed 3-15-02; 8:45 am]
BILLING CODE 8010-01-P