[Federal Register Volume 67, Number 107 (Tuesday, June 4, 2002)]
[Notices]
[Pages 38530-38531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13914]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45992; File No. SR-CBOE-2002-12]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., Relating to Its AutoQuote Triggered EBook Execution 
System

May 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 March 13, 2002, the Chicago Board Options Exchange, 
Incorporated (``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 CBOE. That filing was amended on April 17, 2002.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change 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 Jaime Galvan, CBOE, to Andrew Shipe, Special 
Counsel, Division of Market Regulation, Commission, dated April 16, 
2002 (``Amendment No. 1''). In Amendment No. 1, the CBOE revised its 
proposal to add text to its Rule 6.8(d)(v), rather than adopt an 
interpretation without rule text. For purposes of determining the 
effective date and calculating the 60-day period within which the 
Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers April 17, 
2002 to be the effective date of the proposed rule change, the date 
CBOE filed Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to adopt an interpretation to its ``Trigger'' 
rule (Rule 6.8(d)(v)) to clarify when a Trigger trade must be manually 
endorsed to a trading crowd member(s) instead of to the RAES ``wheel.'' 
Below is the text of the proposed rule change. New text is in italics. 
Proposed deletions are in [brackets].
* * * * *

Chicago Board Options Exchange, Inc. Rules

* * * * *

Chapter VI--Doing Business on the Exchange Floor

Section A: General

    This Rule governs RAES operations in all classes of options, except 
to the extent otherwise expressly provided in this or other Rules in 
respect of specified classes of options.
RULE 6.8 (a)-(c) No change.
    (d) Execution on RAES
    (i)-(iv) No change.
    (v) Notwithstanding sub-paragraph (d)(iv), for classes of options 
as determined by the appropriate Floor Procedure Committee, for any 
series of options where the bid or offer generated by the Exchange's 
Autoquote system (or any Exchange approved proprietary quote generation 
system used in lieu of the Exchange's Autoquote system) is equal to or 
crosses the Exchange's best bid or offer as established by an order in 
the Exchange's limit order book, orders in the book for options of that 
series will be automatically executed against participants on RAES up 
to the number of contracts equal to the applicable maximum size of 
RAES-eligible orders for that series of options (``Trigger''). In the 
event a member in the trading crowd verbally initiates a trade with a 
book order prior to the time the book staff announces to the trading 
crowd that the order has been removed from the book by Trigger, the 
book staff will manually endorse the book order to that member(s). In 
the event the order in the book is for a larger number of contracts 
than the applicable RAES contract limit, the balance of the book order 
will be executed manually by the trading crowd. In the limited 
circumstance where contracts remain in the book after an [automatic] 
execution of a book order up to the applicable RAES contract limit, and 
the disseminated quote remains crossed or locked with the Autoquote bid 
or offer, or for any series where Trigger has not yet been implemented 
by the appropriate Floor Procedure Committee, orders in RAES for 
options of that series will not be automatically executed but instead 
will be rerouted on ORS to the crowd PAR terminal or to another 
location in the event of system problems or contrary firm routing 
instructions.
    (e)-(g) No change.

Interpretations and Polices

    .01-.08  No change.
* * * * *

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 IV 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
    The Exchange proposes to adopt an interpretation to Rule 6.8(d)(v), 
which governs the operation of the AutoQuote Triggered EBook Execution 
system (``Trigger''). The proposed interpretation will make clear when 
a Trigger trade must be endorsed manually to a trading crowd member(s) 
instead of to the RAES ``wheel.'' Trigger is a system that allows 
certain orders resting in the book to be automatically executed in the 
limited situation where the bid or offer for a series of options 
generated by the Exchange's AutoQuote system (or any Exchange approved 
proprietary quote generation system used in lieu of the Exchange's 
AutoQuote system) is equal to or crosses the Exchange's best bid or 
offer for that series as established by a booked order.\4\
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    \4\ The Commission approved the rule governing the Trigger 
system in Securities Exchange Act Release No. 44462 (June 21, 2001), 
66 FR 34495 (June 28, 2001) (approving SR-CBOE-00-22).
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    In those classes where Trigger has been activated, as AutoQuote \5\ 
changes and the quote generated by AutoQuote either touches or crosses 
a resting order in the book on the opposite side of the quote, the 
Trigger process is initiated and the book order(s) is immediately taken 
out of the book (the book order is ``Triggered'') and a last sale is 
disseminated. An inversion notice ticket is printed on the book printer 
and an item will appear on the EBook Trigger Endorsement Screen 
notifying the book clerk that Trigger has taken an order(s) out of the 
book and an endorsement is required. At this point, the book staff will 
announce to the trading crowd that an order in the book has been 
Triggered and the terms of the trade. After the book clerk verifies 
with the DPM (or OBO) that the Trigger trade is valid based on 
movements in the underlying security, the trade will be endorsed by the 
book clerk to the RAES ``wheel'' up to the RAES contract limit 
applicable for that particular series of options.
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    \5\ The use of the term ``AutoQuote'' herein means either the 
Exchange's AutoQuote system or any Exchange-approved proprietary 
quote generation system.
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    In its original filing, the Exchange noted that in most instances a 
Trigger trade will be endorsed to the RAES wheel, but that the Trigger 
system has the functionality to allow the book staff

[[Page 38531]]

to endorse a Trigger trade manually when appropriate.\6\ The typical 
situation that was envisioned by the Exchange that would result in a 
DPM manually endorsing a Trigger trade to a crowd member is when the 
DPM noticed that a crowd member was in the process of verbally 
initiating a trade with the book. In this situation, the DPM could 
decide to utilize the manual endorsement functionality to award the 
Triggered trade to that particular crowd member as opposed to endorsing 
it to the RAES wheel because that crowd member was first to bid (offer) 
for the book order.
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    \6\ 66 FR at 34495.
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    As Trigger has been rolled out to the trading floor, the Exchange 
has observed that while it is possible for the book staff to know 
exactly when a crowd member initiated a trade with the book, it is not 
possible to know exactly when a Trigger activation occurred. When there 
is a crowd member claiming to have traded with the book first and the 
book staff is uncertain which came first, the crowd member's bid or 
offer or the Trigger, the DPM (OBO) practice has been to endorse the 
Trigger trade to the RAES wheel.
    The Exchange proposes to interpret Rule 6.8(d)(v) to require a DPM 
(OBO) to manually endorse a Triggered book order to a crowd member not 
only in the situation when it is known a crowd member was bidding 
(offering) for a book order prior to Trigger activation, but also to a 
crowd member who bids (offers) for a Triggered book order prior to the 
time the book staff announces the Triggered order to the crowd. In 
these instances, the DPM (OBO) will manually endorse the order to the 
crowd member(s) who is bidding (offering) for the booked order that was 
Triggered as opposed to endorsing the order to the RAES wheel.\7\ The 
Exchange believes this interpretation is appropriate for the reason 
that it provides a clear reference point for determining the priority 
of a member's bid or offer in regards to a Triggered book order. The 
proposed interpretation will enable a market maker to trade against a 
Triggered book order in the instance where a market maker initiated the 
procedure to trade with the Triggered book order before it is announced 
to the trading crowd.
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    \7\ As with any trade that takes place at the DPM's previously 
established principal bid or offer, the DPM would be entitled to 
participate in a percentage of the trade with the book order 
pursuant to Rule 8.87 and would manually endorse that portion of the 
order to himself.
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    The general rule will be that if the book staff does not receive 
any bids (offers) from a crowd member for a Triggered book order by the 
time the book staff announces the Triggered order to the crowd, the 
book staff will endorse the trade to the RAES wheel.
2. Statutory Basis
    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b) of the Act\8\ in general and furthers the 
objectives of Section 6(b)(5)\9\ in particular in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act,\10\ and subparagraph (f)(1) of Rule 19b-4 
thereunder because it is designated as a stated policy, practice or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule.\11\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\12\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(1).
    \12\ See supra note 3.
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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 No. CBOE-2002-12 and should 
be submitted by June 25, 2002. 
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    \13\ 17 CFR 200.30-3(a)(12).

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-13914 Filed 6-3-02; 8:45 am]
BILLING CODE 8010-01-P