[Federal Register Volume 67, Number 66 (Friday, April 5, 2002)]
[Notices]
[Pages 16478-16480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8210]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45676; File No. SR-CBOE-2001-70]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of a Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Dissemination of Options Quotations With 
Size

March 29, 2002.

I. Introduction

    On December 28, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission'' or ``SEC''), 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 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''). On January 14, February 27, and 
March 1, 2002, respectively, the Exchange submitted Amendment Nos. 1, 
2, and 3 to the proposal.\3\ Notice of the proposed rule change, as 
amended, appeared in the Federal Register on March 8, 2002.\4\ The 
Commission received no comments on the proposal. This order approves 
the proposed rule change, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letters from Edward J. Joyce, President and Chief 
Operating Officer, CBOE, to Deborah Flynn, Division of Market 
Regulation (``Division''), SEC, dated January 11, 2002 (``Amendment 
No. 1''); Steve Youhn, CBOE, to Deborah Flynn, Division, SEC, dated 
February 13, 2002 (``Amendment No. 2''); and Steve Youhn, CBOE, to 
Deborah Flynn, Division, SEC, dated February 28, 2002 (``Amendment 
No. 3'').
    \4\ See Securities Exchange Act Release No. 45490 (March 1, 
2002), 64 FR 25091.
    \5\ For those series in which the Exchange does not implement 
the QWS system, the Exchange would continue to publish firm quote 
sizes on its website. See CBOE Rule 8.51(c)(2).
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II. Description of the Proposal

    The CBOE proposes to implement a QWS system with an AutoDec feature 
that would enable the Exchange to disseminate options quotations with a 
size that reflects previous executions. The Exchange proposes to 
implement the QWS system gradually on a series-by-series basis.\5\

AutoDec

    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\6\ 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\7\ at the 
disseminated price, until that size was exhausted or until the quote 
was refreshed. Under the proposal, the appropriate Floor Procedure 
Committee (``FPC'') would retain its authority to establish the 
eligible order size permitted to be sent to RAES for a particular 
series at a number less than the disseminated size. Therefore, for 
classes in which the Exchange does not disseminate options quotations 
with size, CBOE Rule 6.8(c)(v) would remain in effect.\8\
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    \6\ For purposes of this rule filing, Autoquote shall refer to 
any automated quotation updating system, whether Exchange-owned or 
proprietary.
    \7\ The Commission's Quote Rule obligates the responsible broker 
or dealer to also be firm for the disseminated size for orders 
executed in open outcry. Rule 11Ac1-1 under the Act, 17 CFR 
240.11Ac1-1.
    \8\ 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. Under these circumstances, the 
Exchange 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.\9\
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    \9\ See proposed CBOE Rule 6.8.09(a)(1). Notwithstanding this 
provision, all orders rerouted from Live Ammo back to RAES would 
receive an automatic execution at the disseminated price even if the 
cumulative size of such rerouted orders exceeds the disseminated 
size. See proposed CBOE Rule 6.8.09(a)(2). See also infra note 13 .
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    Consistent with the current provisions of CBOE Rule 6.8, orders 
eligible for automatic execution would not be executed automatically at 
prices inferior to the national best bid or offer. 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 routed away from RAES to the Exchange's Public Automated 
Routing System (``PAR''), the Exchange's Booth Automated Routing 
Terminal (``BART''), or Live Ammo\10\ and thus may receive a dual-price 
execution.\11\

30-Second Reroute Period
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    \10\ The Live Ammo electronic screen displays market orders or 
limit orders that improve the market. See CBOE Rule 7.4(g).
    \11\ Orders would route to BART only if a firm so chooses.
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    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 
RAES would be automatically routed away from RAES to either PAR, BART, 
or Live Ammo.\12\ During the reroute period, the Exchange would 
disseminate a size of ``1'' with the same price. Upon expiration of the 
reroute period timer, new electronic orders would be eligible for 
automatic execution up to the refreshed disseminated size. The duration 
of the reroute period would be configurable by the DPM on a class basis 
and may not exceed 30-seconds. The appropriate FPC may, however, 
establish a ceiling on that duration not to exceed thirty seconds. The 
DPM may manually override the reroute period 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 the expiration of the 
15-second reroute period, thereby allowing orders to be eligible for 
automatic execution at the refreshed price.
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    \12\ 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 sent upon receipt either to PAR, BART, or Live Ammo. The 
appropriate FPC shall determine by class the location to which to 
route those RAES orders that are submitted during the reroute 
period.
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    Upon expiration of the reroute period, subsequent incoming orders 
that are eligible for automatic execution would

[[Page 16479]]

be eligible to receive automatic execution at the refreshed price.\13\
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    \13\ The Live Ammo terminals feature a ``Live Ammo to RAES'' 
switch that enables the DPM to automatically reroute orders back to 
RAES 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. Orders rerouted from Live Ammo to RAES would 
retain priority over subsequently received RAES orders. See proposed 
CBOE Rule 6.8.09(a)(2).
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RAES Operation

    To facilitate the introduction of QWS, the Exchange proposes to 
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.

Determination of Disseminated Size

    The CBOE proposes that 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. According to the CBOE, 
this entity, in most instances, would either be the DPM, Lead Market-
Maker (``LMM''), or Supplemental Market-Maker (``SMM'') or Appointed 
Market-Maker (``Appointed Market-Maker'') for the class.\14\
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    \14\ 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.
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    While DPMs, 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. The CBOE further proposes that 
the members of the trading crowd, however, may, but are not required 
to, provide the DPM, LMM, SMM, or Appointed Market-Maker with any input 
regarding the size of the undecremented disseminated quote. 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.

Replenishment Timer

    According to the Exchange, because of the preponderance of series 
for which each DPM is responsible for maintaining quotes, the CBOE 
proposes to introduce a replenishment timer to automatically update the 
dissemination of size values. The replenishment timer, which would be 
configurable by class by the DPM, would be 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.\15\
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    \15\ 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 once again be 
200 contracts. The replenishment timer is incorporated in proposed 
CBOE Rule 8.51(c)(2)(b).
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III. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    After careful review, 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.\16\ In particular, the Commission believes that the proposal 
to allow automatic decrementation of disseminated size to reflect 
automatic executions at the disseminated price is consistent with 
Section 6(b)(5),\17\ in that it is designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. Specifically, the Exchange's 
ability to automatically decrement its disseminated size based on 
automatic executions through RAES should enable CBOE members to more 
accurately reflect their liquidity and provide all market participants, 
including investors, with a more accurate measure of the liquidity 
available in CBOE's market at the disseminated price.
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    \16\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    While DPMs, LMMs, SMMs, and Appointed Market-Makers have the 
responsibility to determine the size of the undecremented disseminated 
quote, the proposal would permit the DPM, LMM, SMM, or Appointed 
Market-Maker to consult with and/or agree with other market makers in 
the trading crowd in determining the size of the undecremented 
disseminated quote. The proposal would further allow that the members 
of the trading crowd may, but are not required to, provide the DPM, 
LMM, SMM, or Appointed Market-Maker with any input regarding the size 
of the undecremented disseminated quote. At this time, the Commission 
believes it is reasonable for the Exchange's rules to permit the 
members of the crowd to be given a voice in setting the size associated 
with the Autoquote price because, pursuant to the Exchange's rules, 
they will be obligated to execute orders at that size.
    The Commission notes that to the extent the CBOE no longer 
establishes by rule and periodically publishes quotation sizes pursuant 
to Rule 11Ac1-1(d)(1) under the Act, its members that are responsible 
broker or dealers, likewise, may no longer rely on the exception to the 
Quote Rule that currently relieves them of their obligation pursuant to 
paragraph (c)(1) to Rule 11Ac1-1 to communicate to the Exchange the 
sizes associated with their quotations. In addition, such responsible 
brokers or dealers may no longer comply with its obligations under 
paragraph (c)(2) to Rule 11Ac1-1 by executing orders up to the size 
established by Exchange rule and must, instead, execute any order in 
any amount up to its published quotation size.
    Pursuant to Section 19(b)(2),\18\ the Commission finds good cause 
for approving the proposed rule change, as amended, prior to the 30th 
day after the date of publication of notice thereof in the Federal 
Register. The Commission notes that the proposed rule change was 
published for comment and that no comment letters were received. The 
Commission believes that granting accelerated approval to the proposed 
rule change should allow the CBOE begin to implement, without delay, 
its QWS system with AutoDec, which should enhance the transparency of 
the CBOE market.
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    \18\ 15 U.S.C. 78s(b)(2).

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[[Page 16480]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-CBOE-2001-70) is approved, 
as amended, on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-8210 Filed 4-4-02; 8:45 am]
BILLING CODE 8010-01-P