[Federal Register Volume 68, Number 53 (Wednesday, March 19, 2003)]
[Notices]
[Pages 13350-13352]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6496]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47492; File No. SR-CBOE-2003-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated To Expand the Order Types That Can Trade on the 
Exchange's Large Order Utility (``LOU'')

March 13, 2003.
    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 10, 2003, 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 and 
II below, which Items have been prepared by the Exchange. The Exchange 
has filed the proposal as a ``non-controversial'' rule change pursuant 
to section 19(b)(3)(A) \3\ of the Act and rule 19b-4(f)(6) \4\ 
thereunder, which renders the proposal effective upon filing with the 
Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to expand the order types that can trade on the 
Exchange's LOU system. Below is the text of the proposed rule change. 
Proposed new language is in italics:
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.10 LOU System Operations

    This Rule governs the operation of the Large Order Utility 
(``LOU'') system.
    (a) Definitions. For purposes of this Rule, the following 
definitions shall apply.
    (i) The term ``LOU'' means a facility of the Exchange that provides 
order routing, handling, and execution for eligible options orders 
routed electronically to the Exchange.
    (ii) The term ``In-Person Wheel'' means an order allocation 
mechanism

[[Page 13351]]

whereby orders are evenly assigned to Market-Makers logged onto the In-
Person Wheel for up to five contracts per Market-Maker for each order.
    (iii) The term ``Linkage Order'' means an order routed to the 
Exchange through the Options Intermarket Linkage pursuant to the Plan 
for the Purpose of Creating and Operating an Intermarket Options 
Linkage.
    (b) LOU Eligibility.
    The following criteria must be met for an order to be eligible for 
LOU:
    (i) The order must be a market order or marketable limit order that 
is not for an account in which a member, or any non-member broker-
dealer (including foreign broker-dealer) has an interest except as 
provided under Interpretation .02 of this Rule;
    (ii) The order must be of a size greater than the RAES eligibility 
limit for the subject option series as established pursuant to Rule 
6.8(c);
    (iii) the order may not be a Linkage Order;
    (iv) at the time the order is received, the Exchange must be 
disseminating a quote at the national best bid or offer (NBBO) for the 
appropriate side of the market;
    (v) at the time the order is received, the Exchange's disseminated 
quote may not be a manual quote;
    (vi) the order must be in an option class which is designated as 
subject to the terms of Rule 6.8.B concerning booked orders; and,
    (vii) the order must be in an option class designated by the 
appropriate FPC as subject to this Rule 6.10.
    The senior person then in charge of the Exchange's Control Room 
shall have the authority to turn off LOU with respect to a class of 
options if there is a system malfunction that affects the Exchange's 
ability to disseminate or update market quotes.
    (c) Order Receipt.
    (i) Orders Equal to or Smaller than the Exchange's Disseminated 
Quotation Size. When LOU receives an order smaller than the Exchange's 
disseminated quotation size, the system will automatically stop the 
order against the Exchange's disseminated market. The order will then 
be automatically routed for representation in the crowd to allow for 
price improvement and to allocate the order to members of the trading 
crowd pursuant to paragraph (d) below.
    (ii) Orders Larger than the Exchange's Disseminated Quotation Size. 
When LOU receives an order larger than the Exchange's disseminated 
quotation size, the system will automatically stop a portion of the 
order against the Exchange's disseminated market up to the Exchange's 
disseminated size. The stopped portion of the order will then be 
automatically routed for representation in the crowd to allow for price 
improvement and to allocate the order to members of the trading crowd 
pursuant to paragraph (d) below. Simultaneously, the balance of the 
order that was not stopped at the Exchange's disseminated price will be 
routed for normal order handling.
    (d) Execution and Allocation. Upon receipt, the LOU order (or the 
stopped portion of the LOU order) shall be announced and exposed to the 
crowd to allow for price improvement. Any portion of a LOU order that 
does not receive price improvement will be allocated as follows:
    (i) The LOU order will be assigned in open outcry consistent with 
Rule 6.45 and Rule 8.87. To the extent an order is not fully assigned 
in open outcry, the remaining portion of the order will be assigned to 
Market-Makers via the In-Person Wheel. If a portion of the LOU order 
still remains after the In-Person Wheel allocations are exhausted, the 
balance of the order shall be assigned in accordance with the RAES 
trade allocation methodology in effect for the subject option class 
pursuant to Rule 6.8, Interpretation and Policy .06.
    (e) Obligations of Participating Market-Makers. Any Market-Maker 
who is present in the trading crowd and who makes markets in a 
particular security traded in that crowd, must be logged onto the In-
Person Wheel for that security.

. . . Interpretations and Policies

    .01 The provisions of Rule 8.17 regarding stopping of option orders 
shall not apply to orders received pursuant to this Rule 6.10.
    .02 Broker-Dealer Access to LOU. The appropriate FPC may determine, 
by class and/or series to allow the following broker-dealer orders to 
be eligible for LOU, provided that such broker-dealer orders will not 
be stopped pursuant to this Rule against orders in the limit order 
book:
    (a) broker-dealer orders, or
    (b) broker-dealer orders that are not for the accounts of market-
makers or specialists on an exchange who are exempt from the provisions 
of Regulation T of the Federal Reserve Board pursuant to Section 
7(c)(2) of the Securities Exchange Act of 1934.
* * * * *

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
    On July 11, 2002, the Securities and Exchange Commission 
(``Commission'') approved a CBOE rule change to establish the Large 
Order Utility (``LOU'').\5\ Through LOU, eligible orders larger than 
CBOE's maximum RAES limit for the relevant option are stopped at the 
Exchange's disseminated price up to the size of the Exchange's 
disseminated quote, and are subsequently routed to the trading crowd 
for allocation and possible price improvement in open outcry. Because 
CBOE has recently expanded the RAES system (Rule 6.8) to allow broker-
dealer orders to trade on RAES,\6\ the Exchange now seeks to similarly 
expand Rule 6.10 to allow LOU to handle broker-dealer orders.
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    \5\ See Securities Exchange Act Release No. 46185 (July 11, 
2002), 67 FR 47585 (July 19, 2002).
    \6\ See Securities Exchange Act Release No. 46598 (October 3, 
2002), 67 FR 63478 (October 11, 2002).
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    As proposed, Rule 6.10 would be modified to provide that the 
appropriate Floor Procedure Committee may allow the following two 
broker-dealer order categories to be eligible for LOU on a class or 
series basis: (1) All broker-dealer orders, and (2) all broker-dealer 
orders except orders for the accounts of market makers or specialists. 
These orders would receive full LOU treatment except that they would 
not receive LOU treatment when CBOE's NBBO quote is represented by an 
order on CBOE's limit order book. Currently, broker-dealer orders 
eligible for RAES do not automatically execute against the limit order 
book. Therefore, the Exchange does not believe it is appropriate, at 
this time, to allow broker-dealer orders such capability through LOU.
2. Statutory Basis
    The Exchange believes that the proposed rule change will help a

[[Page 13352]]

broader range of orders to automatically secure disseminated prices. 
The Exchange therefore believes the proposal is consistent with section 
6(b) \7\ of the Act in general and furthers the objectives of section 
6(b)(5) \8\ in particular in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The 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 proposed rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \9\ and rule 19b-4(f)(6) thereunder \10\ 
because the proposed 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 
until more than 30 days from the date on which it was filed, and the 
CBOE provided the Commission with written notice of its intent to file 
the proposed rule change at least five days prior to the filing 
date.\11\ 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 Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ The Exchange submitted a letter to the Division of Market 
Regulation (``Division'') of the Commission stating its belief that 
the proposal is consistent with Section 11(a) of the Act, 15 U.S.C. 
78k(a), and Rule 11a2-2(T) under the Act, 17 CFR 240.11a2-2(T), and 
requesting interpretive guidance. See letter to Catherine McGuire, 
Chief Counsel, Division, Commission, from Stephen M. Youhn, Senior 
Attorney, CBOE, dated March 12, 2003. In response to the Exchange's 
request, Commission staff has provided interpretive guidance to the 
Exchange under Section 11(a) of the Act. See letter from Paula R. 
Jenson, Deputy Chief Counsel, Division, Commission, to Stephen M. 
Youhn, CBOE, dated March 12, 2003.
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    The CBOE has requested that the Commission waive the five-day pre-
filing notice requirement and the 30-day operative delay. The 
Commission believes that waiving the five-day pre-filing notice 
requirement and the 30-day operative delay is consistent with the 
protection of investors and the public interest in that it will enable 
the CBOE to guarantee execution of broker-dealer orders at the 
disseminated price at the full disseminated size (except in the case 
where CBOE's NBBO quote is represented by an order on the Exchange's 
limit order book). For this reason, the Commission designates the 
proposal to be effective and operative immediately.\12\
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    \12\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule 
change's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether it 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. SR-CBOE-2003-09, and should be 
submitted by April 9, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6496 Filed 3-18-03; 8:45 am]
BILLING CODE 8010-01-P