[Federal Register Volume 68, Number 81 (Monday, April 28, 2003)]
[Notices]
[Pages 22426-22429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10388]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47701; File No. SR-CBOE-2003-16]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the Chicago Board Options Exchange, Inc. To Implement 
Autobook on a Pilot Program Basis

April 18, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and rule 19b-4 thereunder,\2\ notice 
is hereby given that on April 8, 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 amended the proposal on April 17,

[[Page 22427]]

2003,\3\ and April 18, 2003.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
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 Patrick Sexton, Assistant General Counsel, 
CBOE, to Christopher Solgan, Attorney, Commission, Division of 
Market Regulation (``Division''), dated April 16, 2003 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange made a technical change 
to the proposed rule text and stated that on April 21, 2003, the 
time period in which DPMs are required to execute or book eligible 
customer limit orders will decrease from 60-seconds to immediately, 
but no later than 30-seconds from receipt under normal market 
conditions. Lastly, the Exchange amended the proposed rule change to 
designate it as filed under section 19(b)(3)(A) and rule 19b-4(f)(6) 
thereunder, rather than section 19(b)(2), of the Act.
    \4\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Deborah Flynn, Assistant Director, Commission, Division, 
dated April 17, 2003 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange requested the Commission accelerate the 30-day operative 
date under section 19(b)(3) of the Act, and rule 19b-4(f)(6) 
thereunder to April 21, 2003. The Exchange also amended the proposed 
rule text to indicate that the pilot program will expire on April 
21, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CBOE rule 8.85 to implement Autobook 
on a pilot program basis. The text of the proposed rule change appears 
below. Additions are in italics.
* * * * *

Rule 8.85 DPM Obligations

    (a) No change.
    (b)(i)-(vi) No change.
    (vii) Autobook Pilot. Maintain and keep active on the DPM's PAR 
workstation at all times the automated limit order display facility 
(``Autobook'') provided by the Exchange. The appropriate Exchange Floor 
Procedure Committee will determine the Autobook timer in all classes 
under that Committee's jurisdiction. A DPM may deactivate Autobook as 
to a class or classes provided that Floor Official approval is 
obtained. The DPM must obtain such approval no later than three minutes 
after deactivation. The Autobook Pilot expires on April 21, 2004, or 
such earlier time as the Commission has approved Autobook on a 
permanent basis.
    To the extent that there is any inconsistency between the specific 
obligations of a DPM set forth in subparagraph (b)(i) through (b)(vii) 
of this rule and the general obligations of a Floor Broker or of an 
Order Book Official under the rules, subparagraph (b)(i) through 
(b)(vii) of this rule shall govern.
    (c)-(e) No change.
    * * * Interpretations and Policies:
    .01--.03 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 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE rule 8.85(b) states, in part, that each Designated Primary 
Market Maker (``DPM'') shall fulfill all the obligations of an Order 
Book Official (``OBO'') under CBOE rules.\5\ Further, CBOE rule 
8.85(b)(i) specifically requires each DPM to enter into the limit order 
book any order in the possession of the DPM which is eligible for entry 
into the book unless the DPM executes the order upon its receipt, or 
the customer who placed the order has requested that the order not be 
booked provided the DPM announces in open outcry the order that would 
be displayed.\6\
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    \5\ CBOE rule 7.7 requires that an OBO, ``in so far as 
practicable,'' display limit orders contained in the OBO's Limit 
Order Book when such limit orders represent the best bid or offer on 
the book.
    \6\ In June 2002, CBOE submitted draft rule change to the 
Commission to implement a limit order display requirement that it 
believes is similar to Exchange Act rule 11Ac1-4 (``Display rule''). 
17 CFR 240.11Ac1-4. CBOE is currently discussing its draft filing 
with Commission staff and anticipates filing a proposed rule change 
in the near future.
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    In addition, pursuant to subparagraph IV.B.f of the Commission's 
September 11, 2000, Order,\7\ CBOE was required to enhance and improve 
its surveillance, investigative and enforcement processes for order 
handling, including the display of customer limit orders in the 
disseminated quotes. In connection with this specific undertaking, in 
January 2002, CBOE issued Regulatory Circular RG02-03 which advised 
that effective January 15, 2002, each DPM was required to execute or 
book 90% of all eligible customer limit orders within 90 seconds of 
receipt or less. Regulatory Circular RG02-03 further advised that 
beginning in July 2002, DPMs were expected to execute or book (with 
certain exceptions) 95% of all eligible customer limit orders within 60 
seconds of receipt or less. DPMs are currently subject to this latter 
60-second requirement, and beginning on April 21, 2003, DPMs will be 
required to execute or book 95% of all eligible customer limit orders 
``immediately'' \8\ but not later than 30-seconds after receipt under 
normal market conditions.\9\
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    \7\ Order Instituting Public Administrative Proceedings Pursuant 
to section 19(h)(1) of the Act. See Securities Exchange Act Release 
No. 43268 (September 11, 2000), Administrative Proceeding File No. 
3-10282 (the ``Order'').
    \8\ In its Adopting Release for the Display rule in the equities 
markets, the Commission stated that to comply with the requirement 
that display take place ``immediately,'' specialists must display 
(or execute or re-route) eligible customer limit orders ``as soon as 
practicable after receipt which under normal market conditions would 
require display no later than 30 seconds after receipt.'' See 
Securities Exchange Act Release No. 37619 (August 29, 1996), 61 FR 
48290 (September 12, 1996). 17 CFR 240.11Ac1-4.
    \9\ Exchange Regulatory Circulars RG02-03, RG02-49, and RG03-03 
discuss the requirement to book limit orders within these time 
periods and describe the sanctioning guidelines for violations.
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    To assist and facilitate DPMs' compliance with their regulatory 
obligation and ensure that eligible customer limit orders are displayed 
in the disseminated quotations as required by CBOE rules and Regulatory 
Circulars, CBOE proposes to institute Autobook on a one-year pilot 
basis. Autobook is an enhancement to the DPM's Public Automated Routing 
(``PAR'') workstation that will automatically facilitate the entry of 
eligible customer limit orders into the limit order book at the end of 
a configurable period of time provided such limit orders have not 
previously been addressed manually by the DPM.\10\ When an eligible 
customer limit order routes to PAR, the DPM addresses that order by 
attempting to execute, display, or route that order (through linkage), 
as appropriate. If there are instances where the DPM has not yet 
addressed the order within the applicable 30-second period,\11\ 
Autobook will automatically display the eligible customer limit order 
in the limit order book at or close to the end of that period. As such, 
Autobook will help to ensure that eligible customer limit orders are 
displayed within the required time period then in effect.
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    \10\ This configurable time period will not exceed the standard 
then in effect on the Exchange. As of April 21, 2003, the 
configurable time period may not exceed 30-seconds, as discussed 
above.
    \11\ On April 21, 2003, the time period in which DPMs are 
required to execute or book eligible customer limit orders will 
decrease from 60-seconds to no later than 30-seconds from receipt 
under normal market conditions. See Amendment No. 1, supra note 3.

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[[Page 22428]]

    The Exchange notes that Autobook does not relieve DPMs of their 
obligation to book eligible customer limit orders on their PAR 
workstation immediately but not later than 30-seconds after 
receipt.\12\ To the extent a DPM excessively relies on Autobook to 
display eligible limit orders without attempting to address these 
orders immediately, it could violate its due diligence obligation. 
Brief or intermittent periods of reliance on Autobook out of necessity, 
however, would not violate the obligation.\13\ Upon approval of this 
rule filing, the Exchange will issue a regulatory circular discussing 
the issue of excessive reliance upon Autobook.
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    \12\ See Amendment No. 1, supra note 3.
    \13\ For example, a DPM for a class that experiences an 
unexpected surge in trading activity would not violate its 
obligations if, because the DPM is not physically able to address 
eligible limit orders within 30-seconds, Autobook displays such 
orders at the end of the time period.
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    Autobook will be an Exchange-mandated facility that will operate 
only on DPM PAR workstations. The appropriate Exchange Committee will 
be responsible for establishing the Autobook timer in all classes under 
that Committee's jurisdiction, and the timer may not exceed the 
customer limit order display requirement then in effect on the 
Exchange.
    A DPM may deactivate Autobook as to a class or classes only upon 
approval by a floor official. The DPM must obtain floor official 
approval as soon as practicable but in no event later than three 
minutes from the time of deactivation. If the DPM does not receive 
approval within three minutes after deactivation, the Exchange will 
review the matter as a regulatory issue.\14\ Floor officials will grant 
approval only in instances when there is an unusual influx of orders or 
movement of the underlying that would result in gap pricing or other 
unusual circumstances.\15\ The Exchange will document all instances 
where a floor official grants approval.
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    \14\ This is consistent with Supplementary Material .15 to New 
York Stock Exchange, Inc. (``NYSE'') rule 79A. See Securities 
Exchange Act Release No. 41386 (May 10, 1999), 64 FR 26809 (May 17, 
1999).
    \15\ This is consistent with Commentary .10 to American Stock 
Exchange LLC (``Amex'') rule 170. See Securities Exchange Act 
Release No. 42952 (June 16, 2000), 65 FR 39210 (June 23, 2000).
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    The Exchange will continue to conduct surveillance to ensure that 
DPMs comply with their obligation to execute or book all eligible limit 
orders within the time period then in effect. CBOE also commits to 
conduct surveillance designed to detect whether DPMs as a matter of 
course rely on Autobook to display all eligible limit orders. A 
practice of excessive reliance upon Autobook will be reviewed by CBOE's 
Regulatory Division as a possible due diligence violation. As part of 
the proposed one-year pilot program, the Exchange will provide to the 
Commission every three months the statistical data it uses to determine 
whether there has been impermissible reliance on Autobook by DPMs.
2. Statutory Basis
    Autobook provides a mechanism to ensure eligible customer limit 
orders do not remain on PAR beyond a specified amount of time. As such, 
the Exchange believes the proposal is consistent with the Act and the 
rules and regulations under the Act applicable to a national securities 
exchange and, in particular, the requirements of section 6(b) of the 
Act.\16\ Specifically, the Exchange believes the proposed rule change 
is consistent with the section 6(b)(5)\17\ 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. Furthermore, the Exchange 
believes that the proposed changes are consistent with the Act's 
requirement that an exchange's rules not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\18\
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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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 Exchange 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, as amended, has become effective 
pursuant to section 19(b)(3)(A) of the Act \19\ and subparagraph (f)(6) 
of rule 19b-4 \20\ thereunder because it does not: (i) Significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate; and the Exchange has given the Commission 
written notice of its intention to file the proposed rule change at 
least five business days prior to filing. 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.\21\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ For purposes of calculating the 60-day abrogation date, the 
Commission considers the 60-day period to have commenced on April 
18, 2003, the date CBOE filed Amendment No. 2.
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    Under rule 19b-4(f)(6)(iii) of the Act,\22\ the proposal does not 
become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest and the Exchange is 
required to give the Commission written notice of its intention to file 
the proposed rule change at least five business days prior to filing. 
The Commission notes that beginning on April 21, 2003, DPMs will be 
required to execute or book 95% of all eligible customer limit orders 
immediately, but not later than 30-seconds after receipt under normal 
market conditions. The Exchange has requested that the Commission 
accelerate the 30-day operative date to April 21, 2003, so that it may 
implement the proposed rule change on that date to assist and 
facilitate DPMs' compliance with their regulatory obligation and ensure 
that eligible customer limit orders are displayed in the disseminated 
quotations immediately. The Exchange contends that this proposed rule 
is substantially similar to comparable rules the Commission approved 
for the Amex and NYSE, which were published for public notice and 
comment.\23\ As a result, the Exchange believes that the proposed rule 
change does not raise any new regulatory issues. The Commission, 
consistent with the protection of investors and the public interest, 
has determined to accelerate the 30-day operative date to April 21, 
2003,\24\ and,

[[Page 22429]]

therefore, the proposal is effective and operative on that date.
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    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ See Securities Exchange Act Release Nos. 42952 (June 16, 
2000), 65 FR 39210 (June 23, 2000) (Commentary .10 to Amex rule 
170); and 41386 (May 10, 1999), 64 FR 26809 (May 17, 1999) 
(Supplementary Material .15 to NYSE rule 79A).
    \24\ For purposes only of accelerating the 30-day operative 
period for 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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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CBOE-2003-16 and should be submitted by May 19, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-10388 Filed 4-25-03; 8:45 am]
BILLING CODE 8010-01-P