[Federal Register Volume 67, Number 67 (Monday, April 8, 2002)]
[Notices]
[Pages 16782-16784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8367]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45670; File No. SR-CBOE-2002-08]


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

March 28, 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 19, 2002, 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 
Exchange. On March 22, 2002, the CBOE submitted Amendment No. 1 to the 
proposed rule change.\3\ On March 27, 2002, the CBOE submitted 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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 Madge M. Hamilton, Attorney, CBOE, to Nancy 
J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated March 22, 2002. The changes made 
by Amendment No. 1 have been incorporated into this notice.
    \4\ See letter from Madge M. Hamilton, Attorney, CBOE, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 22, 
2002. The changes made by Amendment No. 2 have been incorporated 
into this notice.
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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 its rules governing the priority of bids 
and offers and to clarify how orders are to be allocated to market 
participants on the floor.
    Below is the text of the proposed rule change. Deleted language is 
in brackets. Proposed new language is italicized.
    Rule 6.45 Priority of Bids and Offers--Allocation of Trades
    Except as provided by Rules, including but not limited to Rule 
6.2A, 6.8, 6.9, Rule 6.47, Rule 6.74, Rule 8.87, and CBOE Regulatory 
Circulars approved by the SEC concerning Participation Rights, the 
following rules of priority shall be observed with respect to bids and 
offers:
    (a) Priority of bids.
    (i) The highest bid shall have priority, but where two or more bids 
for the same option contract represent the highest price and one such 
bid is displayed in the customer limit order book in accordance with 
Rules 7.7 and 8.85(b), such bid shall have priority over any other bid 
at the post. If more than one public customer order is represented in 
the customer limit order book at the best price, priority shall be 
afforded to such orders in the sequence in which they were received by 
the Order Book Official (``OBO'') or Designated Primary Market-Maker 
(``DPM'').
    (ii) The following applies with respect to orders being represented 
by a Floor Broker, DPM acting as agent under Rule 8.85(b), or OBO, or 
with respect to bids made in response to a specific request from a 
Market-Maker. With respect to each of the following, the Floor Broker, 
DPM, OBO, or Market-Maker shall determine the sequence in which the 
bids were made. 
    (1) If two or more bids represent the highest price and a bid from 
the customer limit order book is not involved, priority shall be 
afforded to such bids in the sequence in which they are made.
    (2) If the bids were made at the same time, or in the event the 
Floor Broker, DPM, OBO, or Market-Maker cannot reasonably determine the 
sequence in which the bids were made, priority shall be apportioned 
equally.
    (3) If the Floor Broker, DPM, OBO, or Market-Maker cannot 
reasonably determine the sequence in which the bids were made beyond a 
certain number of market participants, the Floor Broker, DPM, OBO, or 
Market-Maker shall provide for the remaining contracts, if any, to be 
apportioned equally among those market participants who bid at the best 
price at the time the market was established.
    (4) In the event a market participant declines to accept any 
portion of the available contracts, any remaining contracts shall be 
apportioned equally among the other market participants who bid at the 
best price at the time the market was established until all contracts 
have been apportioned.
    The Floor Broker, DPM, OBO, or Market-Maker shall determine which 
market participants responded at the best market at the time the market 
was established.
    (iii) Any contracts remaining in an order, if any, after giving 
effect to paragraph (ii) above, shall be apportioned equally between 
any other market participants in the trading crowd who bid at the best 
price in a reasonably prompt manner subsequent to the time the market 
was established.
    (iv) Whenever a member requests from members of a trading crowd a 
single bid in excess of the RAES order eligibility size for that option 
class as provided for in Interpretation .11 to Rule 8.7, each member of 
the trading crowd shall be apportioned a share of the executed order 
based on an approximate pro rata percentage, to the extent practicable, 
of the crowd member's portion of the size of the original single bid. 
The member requesting the single bid shall determine what constitutes 
an approximate pro rata percentage of the order that is executed with 
respect to each member of the trading crowd who participated in making 
the single bid.
    (b) Priority of offers.
    The lowest offer shall have priority, but where two or more offers 
for the same option contract represent the lowest price, priority shall 
be determined in the same manner as specified in paragraph (a) in the 
case of bids.
    (c) No change
    (d) No Change
    (e) Exception.
    Notwithstanding anything in paragraphs (a) and (b) to the contrary, 
when a member holding a spread order, a straddle order, or a 
combination order and bidding or offering in a multiple of the minimum 
increment on the basis of a total credit or debit for the order has 
determined that the order may not be executed by a combination of 
transactions with the bids and offers displayed in the customer limit 
order book or announced by members in the trading crowd, then the order 
may be executed as a spread, straddle, or combination at the total 
credit or debit with one other member without giving priority to bids 
or offers of members in the trading crowd that are no better than the 
bids or offers comprising such total debit or credit and bids and 
offers in the customer limit order book provided at least one leg of 
the order would trade at a price that is better than the corresponding 
bid or offer in the book. Under the circumstances described above, a 
stock-option order, as defined in Rule 1.1(ii)(a), has priority over 
the bids and offers of members in the trading crowd but not over the 
bids and offers in the customer limit order book. A stock option order 
as defined in Rule 1.1(ii)(b), consisting of a combination order with 
stock, may be executed in accordance with the first sentence in this 
subparagraph (e).
    * * * Interpretations and Policies:
    .01 No Change

[[Page 16783]]

    .02 The provisions of this rule are subject to Rule 8.7, 
Interpretation and Policy .05, and Rule 8.51.

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 Exchange 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 Exchange 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 submits the proposed change to CBOE Rule 6.45 pursuant to 
subparagraph IV.B.j. of the Commission's Order of September 11, 
2000,\5\ which requires that the options exchanges 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, or the allocation of orders in that option class.''
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    \5\ 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).
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    CBOE Rule 6.45 currently requires that the highest bid or lowest 
offer (``best bid or offer'') shall have priority. CBOE Rule 6.45 also 
provides that, with limited exceptions set forth in 6.45(c) and (d), an 
order representing the best bid or offer in the customer limit order 
book receives priority over another order at the same best price. 
Proposed CBOE Rule 6.45(a)(i) would add that if more than one public 
customer order is represented in the customer limit order book at the 
best price, priority shall be afforded to such orders in the sequence 
in which they were received by the OBO or DPM.
    The Exchange also proposes to adopt CBOE Rule 6.45(a)(ii) to apply 
to those orders represented by a Floor Broker, a DPM acting as agent 
under CBOE Rule 8.85(b), or an OBO, or with respect to bids made in 
response to a specific request from a market maker. In these instances, 
the proposed rule change provides that the Floor Broker, DPM, OBO, or 
Market-Maker shall determine which market participants responded at the 
best market at the time the market was established.\6\ Accordingly, 
this provision provides that the Floor Broker, DPM, OBO, or market 
maker shall determine the sequence in which bids (offers) \7\ were 
made, subject to the following:
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    \6\ The Exchange has represented that it has the ability to 
determine the identity of the individual who allocated a trade 
executed on the Exchange. Telephone conversation between Madge 
Hamilton, Attorney, the CBOE, and Ira Brandriss, Special Counsel, 
Division, Commission, on March 21, 2002.
    \7\ Paragraph (b) of this Rule 6.45 provides generally that in 
cases where two or more offers represent the lowest price, priority 
is determined in the same manner as specified in paragraph (a) in 
the case of bids.
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    (1) If there are two or more bids (offers) at the best price, and 
an order in the customer limit order book is not involved, priority is 
afforded to the orders in the sequence in which they were made. See 
Proposed CBOE Rule 6.45(ii)(1).
    (2) If the bids (offers) were made at the same time, or in the 
event the Floor Broker, DPM, OBO, or market maker cannot reasonably 
determine the sequence in which the bids (offers) were made, priority 
shall be apportioned equally. See Proposed CBOE Rule 6.45(ii)(2).
    (3) If the Floor Broker, DPM, OBO, or market maker cannot 
reasonably determine the sequence in which the bids (offers) were made 
beyond a certain number of market participants, the Floor Broker, DPM, 
OBO, or Market-Maker shall provide for the remaining contracts, if any, 
to be apportioned equally among those market participants who bid 
(offered) at the best price at the time the market was established. See 
Proposed CBOE Rule 6.45(ii)(3).
    (4) In the event a market participant declines to accept any 
portion of the available contracts, any remaining contracts shall be 
apportioned equally among the other market participants who bid 
(offered) at the best price at the time the market was established 
until all contracts have been apportioned.\8\ See Proposed CBOE Rule 
6.45(ii)(4).
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    \8\ In this respect, the Exchange notes that the number of 
contracts the DPM may receive if a participant declines to accept an 
allocation (``unallocated portion'') is still capped by the DPM 
participation entitlement amount (i.e., 30%, 40%, or 50%) unless the 
other participants decline to accept any of the unallocated portion. 
For example, if there is an order in which it has been determined 
that market makers A, B, C, and D are entitled to receive an 
allocation along with the DPM, the order would be allocated as 
follows: 30% to DPM and 17.5% each to A, B, C, and D. If D declines 
to receive an allocation, D's portion would be allocated evenly 
among A, B, and C. The DPM would not be entitled to receive any 
portion of D's allocation because it would result in an allocation 
to the DPM in excess of the 30% participation entitlement. If, 
however, A, B, and C decline to accept any of D's unallocated 
contracts, the DPM could then take those additional contracts.
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    Proposed CBOE Rule 6.45(iii) provides that any contracts remaining 
in an order after the operation of CBOE Rule 6.45(ii) shall be 
apportioned equally between any other market participants in the 
trading crowd who bid (offered) at the best price in a reasonably 
prompt manner subsequent to the time the market was established.
    Proposed CBOE Rule 6.45(iv) provides that whenever a member 
requests from members of a trading crowd a single bid in excess of the 
RAES order eligibility size for that option class as provided for in 
Interpretation .11 to CBOE Rule 8.7, each member of the trading crowd 
shall be apportioned a share of the executed order based on an 
approximate pro rata percentage, to the extent practicable, of the 
crowd member's portion of the size of the original single bid. The 
member requesting the single bid shall determine what constitutes an 
approximate pro rata percentage of the order that is executed with 
respect to each member of the trading crowd who participated in making 
the single bid.
    The proposed amendment to CBOE Rule 6.45 also identifies all other 
Exchange Rules that may have bearing on the allocation of an order. 
These Rules include CBOE Rule 6.2A (``Rapid Opening System''), CBOE 
Rule 6.8 (``RAES Operations''), CBOE Rule 6.9 (``Solicited 
Transactions''), CBOE Rule 6.47 (``Priority on Split Price 
Transactions''), CBOE Rule 6.74 (``Crossing Orders'') and CBOE Rule 
8.87 (``Participation Entitlement of DPMs''), as well as CBOE 
Regulatory Circulars approved by the Commission concerning 
participation rights.\9\
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    \9\ The current participation rights of DPMs under CBOE rules 
are detailed in CBOE Regulatory Circular RG 00-193, dated December 
28, 2000. See Securities Exchange Act Release No. 43750 (December 
20, 2000), 65 FR 82420 (December 28, 2000).
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    Finally, the Exchange proposes to add Interpretation and Policy .02 
to CBOE Rule 6.45. This interpretation will clarify that the provisions 
of CBOE Rule 6.45 are subject to the operation of CBOE Rules 8.7, 
Interpretation and Policy .05, and CBOE Rule 8.51.
2. Statutory Basis
    The proposed rule change provides comprehensive information 
concerning the priority of trades, which furthers the objectives of 
section 6(b)(5) of the Act \10\

[[Page 16784]]

to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and to protect investors and the public 
interest.
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    \10\ 15 U.S.C. 78(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
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 Exchange 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 filing will also be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to file number SR-CBOE-2002-08 and 
should be submitted by April 29, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-8367 Filed 4-5-02; 8:45 am]
BILLING CODE 8010-01-P