[Federal Register Volume 67, Number 83 (Tuesday, April 30, 2002)]
[Notices]
[Page 21305]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10542]



[[Page 21305]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45800; File No. SR-CBOE-2001-65]


Self-Regulatory Organizations; Order Approving 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

April 22, 2002.

I. Introduction

    On December 17, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), 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 permit a single response from 
market makers to a request to execute a large order.\3\ The CBOE filed 
an amendment to the proposed rule change on March 6, 2002.\4\ The 
Federal Register published the proposed rule change and Amendment No. 1 
for comment on March 18, 2002.\5\ The Commission received no comments 
on the proposed rule change. This order approves the proposed rule 
change, as amended by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed this proposed rule change pursuant to the 
provisions of Section IV.B.j. of the Commission's September 11, 2000 
Order Instituting Public Administrative Proceedings Pursuant to 
Section 19(h)(1) of the Act, which required the Exchange, among 
other things, to adopt new, or amend existing, rules to include 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.
    \4\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Deborah Flynn, Assistant Director, Division of Market 
Regulation, 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 
Exchange's Retail Automatic Execution System (``RAES'') order 
eligibility size, unless he or she requested otherwise in a specific 
circumstance.
    \5\ Securities Exchange Act Release No. 45542 (March 12, 2002), 
67 FR 12068.
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II. Description of Proposal

    The CBOE proposes to amend CBOE Rule 8.7 to allow CBOE market 
makers to respond to a member's request for a quick and certain market. 
Proposed Interpretation .11 to CBOE Rule 8.7 would permit market makers 
jointly to discuss a request from a member for a single response to an 
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 be permitted only 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.\6\
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    \6\ 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.
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III. Discussion

    After careful consideration the Commission has determined to 
approve the proposed rule change. For the reasons discussed below, 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,\7\ and, in particular, 
with section 6(b)(8) of the Act,\8\ which requires that the rules of an 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \7\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(8).
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    The proposed rule change would permit CBOE market makers in the 
trading crowd to make a collective response to a request to fill a 
large order, provided that a collective response is requested. The 
Commission believes that this exception recognizes the desire of the 
marketplace to provide a single price to a request to fill a large 
order that a single member would not be able to fill. The Commission 
believes that any anticompetitive effect of this exception is limited 
by requiring that there be a member's specific request for a single 
price and that the order be sufficiently large.\9\ In addition, the 
Commission notes that notwithstanding this exception, a single crowd 
participant may voice a bid or offer independently from, and 
differently from, the LMM and other members of a trading crowd.
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    \9\ The Commission expects the Exchange to monitor the 
collective actions that are undertaken pursuant to the rule change 
approved herein for any undesirable or inappropriate anticompetitive 
effects. The Commission's examination staff will monitor the 
Exchange's efforts in this regard.
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    Although the Exchange states in the proposal its belief that the 
proposed rule change enhances competition, the Commission does not 
agree. The Commission believes, however, that the proposal is not 
inconsistent with the Act because it does not impose an inappropriate 
burden on competition. Moreover, the Commission strongly disagrees with 
the CBOE's statement in its proposal that members representing large 
orders who do not request a single price may not be satisfying their 
duty of best execution because of the risk that the market may move 
substantially as the member attempts to execute the whole order in 
pieces. The Commission also notes that in Amendment No. 1, the Exchange 
deleted 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. 
In light of this change, and for the reasons set forth above, the 
Commission finds that the proposed rule change is consistent with the 
Act.
    Finally, the Commission finds that the proposed rule change is 
designed to effectively limit the circumstances in which collective 
action is permissible.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-2001-65), as amended, 
is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    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. 02-10542 Filed 4-29-02; 8:45 am]
BILLING CODE 8010-01-P