[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36277-36279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12982]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45935; File No. SR-CBOE-2002-08]


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

May 15, 2002.

I. Introduction

    On February 15, 2002, 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 relating to the allocation of 
orders. On March 22, 2002, and March 27, 2002, the CBOE submitted 
Amendment Nos. 1 and 2, respectively, to the proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on April 8, 2002.\3\ The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 45670 (March 28, 
2002), 67 FR 16782 (April 8, 2002) (``Notice'').
---------------------------------------------------------------------------

II. Description of Proposal

    CBOE Rule 6.45, to be retitled ``Priority of Bids and Offers--
Allocation of Trades,'' includes provisions that govern the allocation 
of an order on the Exchange when more than one market participant is 
bidding or offering at the best price to fill that order. As described 
below, the CBOE is proposing to amend Rule 6.45 by adding a number of 
provisions concerning specific aspects of the allocation process, and 
by clarifying how an order is to be allocated in certain situations 
where the rule currently is silent.
    The CBOE is also proposing to amend Rule 6.45 by adding a clause 
that stipulates that the rule's provisions apply except as provided by 
certain other CBOE rules concerning the allocation of orders and the 
participations of various market participants. These other rules 
include, but are not limited to, 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.\4\
---------------------------------------------------------------------------

    \4\ The current participation rights of Designated Primary 
Market-Makers (``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).
---------------------------------------------------------------------------

    The proposed rule change was submitted by CBOE 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.''
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    CBOE Rule 6.45 currently requires that the highest bid or lowest 
offer (``best bid or offer'') shall have priority. The rule 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. The 
proposed rule change would add CBOE Rule 6.45(a)(i) to provide that if 
more than one public customer order is represented in the customer 
limit order book at the best price, priority will be afforded to such 
orders in the sequence in which they were received by the OBO or DPM.
    CBOE is also proposing to add CBOE Rule 6.45(a)(ii) to apply with 
respect to bids or offers for orders represented by a Floor Broker, a 
Designated Primary Market-Maker (``DPM'') acting as agent under CBOE 
Rule 8.85(b), or an Order Book Official (``OBO''), or bids or offers 
made in response to a specific request from a Market-Maker. In these 
instances, the proposed rule change would provide that the Floor 
Broker, DPM, OBO, or Market-Maker will determine which market 
participants responded at the best market at the time the market was 
established. This provision would further state that the Floor Broker, 
DPM, OBO, or Market-Maker will determine the sequence in which bids 
(offers) were made, subject to the following:
    (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

[[Page 36278]]

orders in the sequence in which they were made.
    (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 
will be apportioned equally.
    (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 will 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.
    (4) In the event a market participant declines to accept any 
portion of the available contracts, the proposed rule change would 
provide that any remaining contracts will 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.
    The CBOE is also proposing to add CBOE Rule 6.45(iii) to provide 
that any contracts remaining in an order after the operation of CBOE 
Rule 6.45(ii) will 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.
    CBOE Rule 6.45(iv) would further provide 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 
will 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 new 
rule provision also would provide that the member requesting the single 
bid will 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.
    Finally, the proposed rule change would add Interpretation and 
Policy .02 to CBOE Rule 6.45, to clarify that the provisions of CBOE 
Rule 6.45 are subject to the operation of CBOE Rules 8.7, 
Interpretation and Policy .05,\6\ and CBOE Rule 8.51 (``Firm 
Disseminated Market Quotes'').
---------------------------------------------------------------------------

    \6\ Interpretation and Policy .05 to CBOE Rule 8.7 provides: 
Unless an options class is exempted by the appropriate Market 
Performance Committee, under normal market conditions a Market-
Maker's bid or offer for a series of options of unspecified size is 
for five contracts except that a Market-Maker may be compelled to 
buy or sell a specific number of contracts at the disseminated bid 
or offer pursuant to his obligations under Rule 8.51.
---------------------------------------------------------------------------

III. Discussion

    After careful consideration, the Commission has determined to 
approve the proposed rule change.\7\ 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, and, in particular, with 
the requirements of Section 6(b)(5) of the Act.\8\
---------------------------------------------------------------------------

    \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)(5). Section 6(b)(5) of the Act requires 
that the rules of an exchange, among other things, be designed to 
prevent fraudulent and manipulative acts and practices, 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, in general, to protect investors and the public 
interest; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    The Commission believes that the provision of the proposed rule 
change specifying the allocation sequence where more than one public 
customer order is represented in the customer limit order book 
clarifies that priority in such situations is established according to 
the sequence in which the orders were received by the OBO or DPM and is 
consistent with other Exchange rules that reflect the principle of time 
priority.
    The Commission also believes that other provisions of the proposed 
rule change better specify the Exchange's priority rules by setting 
forth how an order is to be allocated among market participants bidding 
or offering at the best price in situations when: (1) Their competing 
bids or offers are made simultaneously; (2) the sequence in which their 
bids or offers were made cannot be reasonably determined; or (3) the 
sequence cannot be reasonably determined beyond a certain number of 
participants. The Commission believes that the proposed amendment 
establishes a fair and equitable manner of apportioning an order in 
these situations by providing that the bids or offers have equal 
priority, so that each participant receives an equal share of the 
order.
    In the Commission's view, the proposed rule change further provides 
important clarification as to who is responsible, in any given trade, 
to determine which market participants responded with bids or offers at 
the best market at the time a market was established, and to allocate 
the trade according to the applicable priority rules. As discussed 
above, the proposed rule change assigns this responsibility to the 
Floor Broker, the DPM acting as agent, the OBO that is representing the 
order to which market participants are responding, or to a market maker 
with respect to bids made in response to his specific request. The 
Commission believes that this is a reasonable method of assigning 
responsibility for allocating a trade, particularly because the market 
participant representing the order or initiating the trade generally is 
in the best position to determine the identity and sequence of who 
responded. The CBOE has represented that it has the ability to 
determine the identity of the individual who allocated a particular 
trade,\9\ and the Commission believes that the ability to identify such 
individual is important to the Exchange's ability to monitor for any 
violation of Exchange allocation rules.
---------------------------------------------------------------------------

    \9\ See Notice, supra note 3, at n.6.
---------------------------------------------------------------------------

    The proposed rule change further specifies how participation in a 
trade is allocated in the situation where a member requests a single 
bid from members of a trading crowd and the trade is effected pursuant 
to Interpretation .11 to CBOE Rule 8.7.\10\ The Commission believes 
that the proposed amendment, which would provide that the order be 
allocated based on an approximate pro rata percentage, to the extent 
practicable, of the respective sizes that crowd participants have 
indicated they are willing to buy or sell, is a reasonable way to 
apportion participation in such trades. The Commission believes that it 
is reasonable, as provided by the proposed rule change, to assign the 
member who requested the single bid the responsibility to determine 
what constitutes an approximate pro rata percentage of the order for 
each participant.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 45800 (April 22, 
2002), 67 FR 21305 (April 30, 2002) (SR-CBOE-2001-65).
---------------------------------------------------------------------------

    The proposed rule change also would make clear that in the event a 
market participant declines to accept a portion of the contracts to 
which he or she is entitled, the remainder is to be apportioned equally 
among the participants who bid or offered at the best price when the 
market was established. The Commission notes, in this connection, that 
the CBOE's proposed Interpretation and Policy .02

[[Page 36279]]

to CBOE Rule 6.45 provides that the provisions of CBOE Rule 6.45 are 
subject to CBOE Rule 8.7, Interpretation and Policy .05, and CBOE Rule 
8.51, which set forth market maker responsibilities and firm quote 
requirements.
    The Commission further notes that the CBOE has made clear that a 
DPM that already has been allocated its DPM participation entitlement 
amount would not receive a share of the declined contracts unless the 
other market participants do not wish to participate in the declined 
contracts.\11\ The Commission believes that this will help assure fair 
allocation of orders and maintain a competitive environment on the 
Exchange.
---------------------------------------------------------------------------

    \11\ See Notice, supra note 3, at n.8.
---------------------------------------------------------------------------

    The Commission also finds reasonable CBOE's proposal to apportion 
equally among 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, any contracts that remain in an order 
after giving effect to the priority rules described above.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-2002-08) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12982 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P