[Federal Register Volume 67, Number 66 (Friday, April 5, 2002)]
[Notices]
[Pages 16476-16478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8209]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45677; File No. SR-CBOE-2002-07]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Chicago Board Options Exchange, Inc. 
Relating to the Execution of Incoming RAES Orders Against Manual Quotes

March 29, 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 February 14, 2002, 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.\3\ On February 28, 2002 and March 25, 2002, the Exchange 
submitted Amendment Nos. 1 \4\ and 2 \5\ to the proposal, respectively. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange initially submitted this proposal to the 
Commission on December 28, 2001 as part of File No. SR-CBOE-2001-70 
and subsequently withdrew that portion of the filing relating to 
manual quotes. See Securities Exchange Act Release No. 45490 (March 
1, 2002), 64 FR 25091 (March 8, 2002) (notice soliciting public 
comment on File No. SR-CBOE-2001-70).
    \4\ See letter from Edward J. Joyce, President and Chief 
Operating Officer, CBOE, to Deborah Flynn, Division of Market 
Regulation (``Division''), Commission, dated February 27, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Exchange proposed 
additional rule text to clarify the intended operation of the 
proposal.
    \5\ See letter from Edward J. Joyce, President and Chief 
Operating Officer, CBOE, to Deborah Flynn, Division, Commission, 
dated March 22, 2002 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange proposes changes to the rule text of CBOE Rules 6.8 and 
6.43 with regard to the dissemination of manual quotes. In addition, 
the Exchange proposes to amend CBOE Rule 6.8 regarding the 
obligation of Designated Primary Market Makers (``DPMs'') to use 
their best efforts to ensure that a member that enters a manual 
quote will receive an allocation of incoming order(s) for up to such 
member's disseminated size.
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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 6.43 regarding 
orders entered into its Retail Automatic Execution System (``RAES'') 
for execution against manual quotes. Below is the text of the proposed 
rule change. Additions are italicized.
* * * * *
Rule 6.8: RAES Operations
    (a)-(c) no change
    (d)(i)-(v) no change
    (vi) RAES orders will not execute against manual quotes (as defined 
in Rule 6.43). When a manual quote is the disseminated quote, orders 
submitted for automatic execution in that series shall be automatically 
routed to PAR, BART, or Live Ammo. When orders route to PAR or Live 
Ammo as a result of a manual quote, Designated Primary Market Makers 
(``DPMs'') will use their best efforts to attempt to ensure that the 
member will receive an allocation of incoming order(s) for up to his/
her disseminated size.
* * * * *
Rule 6.43 Manner of Bidding and Offering
    (a) Bids and offers to be effective must be made at the post by 
public outcry, except that bids and offers made by the Board Broker or 
Order Book Official shall be effective if displayed in a visible manner 
in accordance with Rule 7.7. All bids and offers shall be general ones 
and shall not be specified for acceptance by particular members.
    (b) Members of the trading crowd may verbalize quotes (``manual 
quotes'') to be input into Exchange systems by quote reporters for 
dissemination to the Options Price Reporting Authority (``OPRA''). 
Manual quotes must be for a minimum size of five (5) contracts. A 
manual quote will remain as the Exchange's disseminated quote until 
executions deplete the size, until the market maker or floor broker 
withdraws the quote, or until matched or improved by Autoquote or 
improved by an order in the electronic Book.
* * * * *

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 III 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
    CBOE Rule 6.8 governs the operation of RAES. RAES generally 
provides for automatic executions at the Exchange's disseminated quote, 
regardless of whether the disseminated quote represents the Autoquote-
generated price or a manual quote put up on behalf of a market maker or 
floor broker. Once executed, RAES trades are assigned to market makers 
in accordance with the procedures contained in CBOE Rule 6.8.06. CBOE 
Rule 6.8.06 does not provide for the automatic allocation of RAES 
orders to a specific market maker, even if the RAES trade occurred at 
that market maker's quote.
    The Exchange proposes that when a manual quote \6\ represents the 
Exchange's disseminated quote, RAES would not automatically execute an 
order and assign it to market participants. Rather, the Exchange's 
Order Routing System (``ORS'') would block incoming orders from 
automatic execution and instead, immediately route them to Exchange's 
Public Automated Routing System (``PAR''), the Exchange's Booth 
Automated Routing Terminal (``BART''), or Live Ammo,\7\ where they 
would be executed manually at the disseminated price up to the 
disseminated size.\8\ Electronic orders would continue to be blocked 
from receiving automatic execution as long as a manual quote is the 
Exchange's disseminated quote. A manual quote would remain as the 
Exchange's disseminated quote until executions deplete the size, until 
the market maker or floor broker withdraws the quote, or until 
Autoquote matches the manual quote.\9\ The minimum size

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order that could be manually entered by a crowd member would be five 
contracts. Accordingly, any member in the crowd would have the ability 
to cause a manual quote that improves the disseminated quote to become 
the new disseminated quote, provided that quote is for at least five 
contracts.\10\
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    \6\ See Amendment No. 2, supra note 5. Pursuant to proposed 
paragraph (b) to CBOE Rule 6.43, a manual quote is a quote that is 
verbalized by an Exchange member to be input into Exchange systems 
by a quote reporter for dissemination to OPRA.
    \7\ The Live Ammo electronic screen displays market orders or 
limit orders that improve the market. See CBOE Rule 7.4(g).
    \8\ See Proposed CBOE Rule 6.8(d)(vi).
    \9\ See Amendment No. 2, supra note 5. Pursuant to proposed CBOE 
Rule 6.43(b), a member's manual quote will lose priority when 
matched by the Autoquote. The Commission notes that the Exchange 
filed a proposed rule change, File No. SR-CBOE-2002-05, proposing a 
new rule, CBOE Rule 6.8B, that would require that a member that 
places an order in EBook that is the Exchange's disseminated quote 
retain priority to the extent of the size of his quote, even if such 
member's bid or offer is subsequently matched by Autoquote. CBOE 
staff represents that, in connection with its proposed rule change 
filed in SR-CBOE-2002-05, it will amend proposed CBOE Rule 6.43 to 
clarify that at such time as the CBOE Rule 6.8B applies to a given 
option series, the provisions of CBOE Rule 6.8B governing priority 
of orders in EBook shall supersede the provision of proposed CBOE 
Rule 6.43(b) under which a member would lose priority when Autoquote 
matches his manual quote. Telephone conversation between Steve 
Youhn, CBOE, and Elizabeth King, Division, Commission, on March 28, 
2002.
    \10\ See Proposed CBOE Rule 6.8(d)(vi).
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    When orders route to PAR or Live Ammo as a result of a manual 
quote, DPMs would use their ``best efforts'' to attempt to ensure that 
the member that put up the quote will receive the incoming order(s) for 
up to his/her disseminated size.\11\ The term ``best efforts'' entails 
several safeguards designed to help facilitate the manual assignment of 
RAES orders to the member that put up the quote. First, the Exchange 
notes that given the open outcry environment of the trading floor, DPMs 
would more than likely hear the member verbalizing the order. Second, 
other market participants would likely hear the order being verbalized 
and would be able to inform the DPM of the identity of the market maker 
whose quote was disseminated. Third, the member who put the quote up 
would have a strong interest in stepping forward and claiming the 
contracts for which he just bid/offered. Fourth, because a manual quote 
is a member's quote, it may not be representative of the DPM's market. 
As such, the DPM would have a strong interest in determining against 
whose quote incoming RAES orders executed, or else the entire crowd 
would be obligated. Finally, the Exchange notes that quote reporters 
are present in the crowd and should know which member submitted a 
manual quote for dissemination.
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    \11\ See Amendment No. 2, supra note 5.
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    The Exchange believes that this proposal represents a substantial 
step toward enhancing incentives to members to quote competitively by 
providing them with an opportunity to receive allocations of trades 
that execute against quotes they caused to be disseminated. Upon 
approval of the filing, the Exchange commits to provide notification to 
its members apprising them of the substance of the filing (i.e., that 
RAES orders would not automatically execute against manual quotes). 
This notification process would include distribution of a circular to 
members as well as reference on the CBOE Web site.
2. Statutory Basis
    For the reasons discussed above, 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.\12\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \13\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts and, in general, to 
protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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.

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. 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-2002-07 and should be submitted by April 26, 2002.

IV. Commission Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange,\14\ and, in 
particular, section 6(b)(5) of the Act \15\ in that the proposed rule 
change has been designed to remove impediments to and to perfect the 
mechanism of a free and open market and a national market system, while 
also protecting investors and the public interest. Specifically, the 
Commission believes that the proposed rule change, which allocates 
incoming orders to the floor broker or market maker that established 
the Exchange's disseminated quote, should encourage competition among 
trading crowd participants by providing a greater incentive for floor 
brokers and market makers to improve the Exchange's disseminated quote. 
In this regard, the Commission notes that the Exchange's rules would 
provide that a member who enters a manual quote that improves the 
Exchange's disseminated quote should receive the benefit of trading 
with incoming orders at such member's disseminated price and size.
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    \14\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that any member of the trading crowd who 
submits a manual quote that improves the Exchange's disseminated quote 
would be considered to be the responsible broker or dealer pursuant to 
Rule 11Ac1-1(c) under the Act.\16\ Consequently, the Exchange has an 
obligation pursuant to Rule 11Ac1-1(b) under the Act to disseminate the 
member's quote and the member has an obligation pursuant to Rule 11Ac1-
1(c) under the Act to be firm at that price for up to its disseminated 
size. In addition, the Commission believes that investors should 
benefit from the opportunity to receive executions of their orders at 
improved prices.
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    \16\ 17 CFR 240.11Ac1-1.
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    The Commission finds good cause, consistent with section 19(b)(2) 
of the Act,\17\ to grant the Exchange's request for approval of the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission believes that granting accelerated approval to the proposed 
rule change and amendments thereto should allow the CBOE to quickly

[[Page 16478]]

implement its proposed improvement to its market to encourage greater 
competition among trading crowd participants.
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    \17\ 15 U.S.C. 78s(b)(2).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the Exchange's proposed rule change, as amended, (File 
No. SR-CBOE-2002-07) is approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-8209 Filed 4-4-02; 8:45 am]
BILLING CODE 8010-01-P