[Federal Register Volume 67, Number 198 (Friday, October 11, 2002)]
[Notices]
[Pages 63478-63480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26018]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46598; File No. SR-CBOE-2002-56]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to Broker-Dealer Access on RAES

October 3, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 25, 2002, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the CBOE. 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. 78(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE is proposing to allow broker-dealer (``BD'') orders in 
equity options to be eligible for routing through the Exchange's Retail 
Automatic Execution System (``RAES''). The text of the proposed rule 
change is available at the Office of the Secretary, CBOE and at the 
Commission.

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 parts 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 currently allows BD orders in certain index option 
series to receive automatic execution through RAES, subject to the 
conditions contained in Interpretation and Policy .01 (``I&P .01'') to 
CBOE Rule 6.8. CBOE hereby proposes to amend I&P .01 to allow BDs to 
submit orders through RAES in certain equity option classes and/or 
series.\3\ Under the proposal, the Exchange intends to vest the 
appropriate floor procedure committee (``FPC'') with the authority to 
determine the classes and/or series in which BDs may submit orders 
through RAES.\4\ As such, the Equity Floor Procedure Committee 
(``EFPC'') would have responsibility for determining the eligible 
equity option classes and/or series while the Index FPC (``IFPC'') 
would have the authority for determining the eligible index option 
classes and/or series (with the exception of the S&P 500, which falls 
under the jurisdiction of the SPX FPC). In this regard, the Exchange 
notes that with respect to equity options, the EFPC could determine to 
make BD orders eligible for automatic execution in the 100 most active 
classes, or conversely, the EFPC may allow BD orders in all series in 
all equity option classes. Pronouncements regarding eligible classes 
and/or series will be made by Regulatory Circular. The Exchange does 
not propose any changes to the types of BD orders eligible for 
automatic execution.\5\
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    \3\ Correspondingly, BDs will be eligible to submit orders in 
certain index option classes and/or series. Currently, BDs may 
submit orders in certain index option series.
    \4\ The current rule allows the Exchange to determine the 
products in which BD orders may be submitted to RAES.
    \5\ Currently, the Exchange may allow all categories of BD 
orders to receive automatic execution or it may allow only those BD 
orders that are not for the accounts of market makers or specialists 
to qualify for automatic execution.
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    Currently, there are three primary limitations on BD access to 
RAES: (1) BD orders may not automatically

[[Page 63479]]

execute against orders in the book; \6\ (2) the eligible size limit for 
BD orders may be established at a level lower than that for public 
customer orders; \7\ and (3) BD orders may not be eligible for 
automatic step-up.\8\ The Exchange proposes to retain these three 
limitations (with the modifications described in the accompanying 
footnotes.)
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    \6\ CBOE Rule 6.8.01(b). The Exchange proposes to keep this 
provision but renumber it as 6.8.01(b)(1).
    \7\ This provision has been renumbered from 6.8.01(c)(1) to 
6.8.01(b)(2).
    \8\ This provision has been renumbered from 6.8.01(c)(2) to 
6.8.01(b)(3). In addition, the Exchange amends this provision to 
clarify that BD orders that are ineligible for automatic execution 
by opertion of this section shall be routed either to PAR or BART 
for manual handling.
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    BD orders executed through RAES will continue to be subject to the 
requirements of CBOE Rule 6.8. In this regard the Exchange notes that 
BD orders and public customer orders will both be subject to CBOE Rule 
6.8(e)(iii), which prohibits the entry of multiple orders in a put and/
or call class within a 15-second period for an account or accounts of 
the same beneficial owner.\9\ Correspondingly, the Exchange proposes 
herein to amend CBOE Rule 6.8A (Electronically Generated and 
Communicated Orders) to clarify its applicability to BD orders executed 
through RAES. CBOE Rule 6.8A currently applies to all RAES-eligible 
orders, however, because it was adopted prior to the allowance of BD 
orders in RAES, it makes reference to the term ``public customers.'' 
Now that BD orders are eligible for execution through RAES, the 
reference to public customers in CBOE Rule 6.8A is incorrect. This 
proposal therefore eliminates that reference. The Exchange notes that 
Phlx Rule 1080, Commentary .05(i) codifies this same principle (i.e., 
BD orders are subject to the restriction against electronically 
generated orders).
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    \9\ See also Phlx Rule 1080, Commentary .05(iii), which contains 
the identical restriction and was approved by the SEC. Exchange Act 
Release No. 45484 (February 27, 2002), 67 FR 10465 (March 7, 2002).
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    Finally, the current rule was approved on a pilot basis until 
November 20, 2002.\10\ The Exchange proposes to eliminate the pilot 
status of the current rule and seek permanent approval of the new rule. 
The Exchange believes there are several reasons why permanent approval 
is justified. First, CBOE initially proposed the pilot program as a way 
to allow it to evaluate the effectiveness of the program after six 
months of operation. The pilot program was NOT proposed due to any SEC 
concerns. Therefore, the Exchange believes that there are no attendant 
regulatory concerns that would require continued operation under pilot 
status. Second, the pilot program has worked well and has attracted 
order flow to the Exchange without causing any operational problems or 
difficulties. Expanding the rule to apply to equities similarly will 
not cause any operational problems and will enhance the Exchange's 
competitive position. Third, the PCX rule was approved on a permanent 
basis,\11\ accordingly, there is precedent for permanent approval. In 
this respect, the Exchange notes that all floor-based exchanges have 
(or are in the process of adopting) approved rules that grant BD access 
to automatic execution systems. Finally, the pilot expires in November 
and it is likely that SEC approval of this filing will not occur until 
late September or early October. By that time, the Exchange would have 
to submit an additional rule filing to seek permanent approval anyways. 
In short, this filing raises no new or unique issues of substance and, 
therefore, the Exchange believes it is practical to request permanent 
approval in this proposal instead of having to submit an additional 
filing a few weeks later.
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    \10\ See Securities Exchange Act Release Nos. 45967 (May 20, 
2002), 67 FR 37888 (May 27, 2002) and 46113 (June 25, 2002), 67 FR 
44486 (July 2, 2002).
    \11\ See Securities Exchange Act Release No. 45032 (November 6, 
2001), 66 FR 57145 (November 14, 2001).
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2. Statutory Basis
    The Exchange believes that this proposal will enhance the ability 
of BD orders to receive automatic executions in equity options, which 
should provide greater certainty to BDs with respect to their routing 
decisions. The Exchange further believes that this proposal, by 
allowing BD orders to receive automatic executions, will also increase 
depth and liquidity in those affected classes. Accordingly, the 
Exchange believes the proposed rule change is consistent with the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\12\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \13\ requirements 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and, 
in general, to protect investors and the public interest.\14\
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Commission staff has provided interpretative guidance to 
the Exchange regarding the application of Section 11(a) of the Act, 
15 U.S.C. 78k(a), to the RAES system. See letter from Paula Jenson, 
Deputy Chief Counsel, Division of Market Regulation, Commission, to 
Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE, 
dated May 16, 2002.
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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 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 been filed by the Exchange as a 
``non-controversial'' rule change pursuant to section 19(b)(3)(A)(i) of 
the Act \15\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\16\ 
Consequently, because the foregoing rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for thirty days from the date on 
which it was filed or such shorter time as the Commission may designate 
if consistent with the protection of investors and the public interest, 
and the Exchange provided the Commission with written notice of its 
intent to file the proposed rule change at least five days prior to the 
filing date, it has become effective pursuant to section 19(b)(3)(A) of 
the Act and Rule 19b-4 thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(i).
    \16\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange seeks to 
have the proposed rule change become operative immediately so that it 
may compete with other options exchanges.
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    \17\ 17 CFR 240.19b-4(f)(6).
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
effective as of the date of this order.\18\ The Commission

[[Page 63480]]

notes that the other options exchanges currently permit BD orders to 
access their automatic execution systems and the Commission believes 
that this proposed rule change could enhance competition for BD orders 
in the options markets.
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    \18\ For purposes of only accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such 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 Exchange Act.

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 CBOE. 
All submissions should refer to File No. SR-CBOE-2002-56 and should be 
submitted by November 1, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26018 Filed 10-10-02; 8:45 am]
BILLING CODE 8010-01-P