[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47116-47119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20126]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48267; File No. SR-CBOE-2003-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated To Amend 
CBOE Rule 6.24 Relating to Systematizing Orders

July 31, 2003.
    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 May 5, 2003, 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. 
On July 29, 2003, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ 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\ Amendment No. 1 replaces and supercedes the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange submitted this proposed rule change in order to comply 
with the requirement to implement a consolidated options audit trail 
system (``COATS''). The Exchange is submitting the proposed rule change 
to CBOE Rule 6.24 in connection with subparagraph IV.B.e(v) of the 
Commission's September 11, 2000 Order (``Order'').\4\
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    \4\ 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).
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    The text of the proposed rule change is set forth below. New text 
is in italics; deletions are in brackets.
* * * * *

[[Page 47117]]

Chapter VI

* * * * *
Section B: Member Activities on the Floor
* * * * *
[Orders Required To Be in Written Form] Required Order Information
Rule 6.24
    (a) [Transmitted to the Floor. Each order transmitted to the floor 
must be recorded legibly in a written form that has been approved by 
the Exchange, and the member receiving such order must record the time 
of its receipt on the floor. Each such order must be in legible written 
form when taken to the post for attempted execution.] Orders Must Be 
Systematized. Commencing not later than August 29, 2003, each order, 
cancellation of, or change to an order transmitted to the Exchange must 
be systematized, in a format approved by the Exchange, either before it 
is sent to the Exchange or upon receipt on the floor of the Exchange.
    An order is systematized if:
    1. it is sent electronically to the Exchange; or
    2. it is input electronically into the Exchange's systems 
immediately upon receipt on the Exchange, e.g., telephone orders.
    (b) [Cancellations and Changes. Each cancellation of, or change to, 
an order that has been transmitted to the floor must be recorded 
legibly in a written form that has been approved by the Exchange, and 
the member receiving such cancellation or change must record the time 
of its receipt on the floor.] Exempt classes. The Exchange may exempt 
non-multiply listed index and other option classes traded exclusively 
on the Exchange other than equity option classes (exempt classes) from 
the requirements in paragraph (a) of this Rule. With respect to orders 
for exempt classes:
    (i) Transmitted to the Floor. Each order for an exempt class 
transmitted to the floor must be recorded legibly in a written form 
that has been approved by the Exchange, and the member receiving such 
order must record the time of its receipt on the floor. Each such order 
must be in legible written form when taken to the post for attempted 
execution.
    (ii) Cancellations and Changes. Each cancellation of, or change to, 
an order for an exempt class that has been transmitted to the floor 
must be recorded legibly in a written form that has been approved by 
the Exchange, and the member receiving such cancellation or change must 
record the time of its receipt on the floor.
    ([c]iii) Executions. A member transmitting from the floor a report 
of the execution of an order for an exempt class must record the time 
at which a report of such execution is received by such member.
    ([d]iv) On-floor Market-Maker Orders. Each order for an exempt 
class transmitted by a Market-Maker while on the floor, including any 
cancellation of or change to such order, must be recorded legibly in a 
written form that has been approved by the Exchange, and must be time 
stamped immediately prior to its transmission.
* * * Interpretations and Policies
    .01 Any member desiring to use an order form other than those 
provided by the Exchange must submit such form to the appropriate Floor 
Procedure Committee and obtain its approval prior to using such form on 
the Floor.
    .02 (a) [Without limiting the applicability of the foregoing, the] 
The use of hand signal communications on the floor of the Exchange may 
be used to initiate an order, to increase or decrease the size of an 
order, to change an order's limit, to cancel an order, or to activate a 
market order. [Unless an options class is exempted by the Exchange, 
a]Any initiation, cancellation, or change of an order relayed to a 
floor broker through the use of hand signals also must be relayed to 
the floor broker in [written] electronic form[, time-stamped,] 
immediately thereafter, unless the Exchange exempts an option class 
from this requirement. All other rules applicable to order preparation 
and retention, and reporting duties are applicable to orders in 
exempted options classes under this Interpretation, except that the 
record-keeping obligation lies with the member signaling the order 
where a hand signal is used. All cancellations and changes of orders 
held by the Board Broker or Order Book Official must be provided in 
[written] electronic form.
    (b) [Until further notice the following are exempt options classes 
under this Interpretation: OEX, SPX, NSX, and DJX.] The Exchange may 
exempt non-multiply listed index and other option classes traded 
exclusively on the Exchange other than equity option classes under this 
Interpretation. The Exchange will publish via regulatory circular those 
options classes that it has exempted under this Interpretation.
    .03 The appropriate Floor Procedure Committee will from time to 
time prescribe the form of Telephone and Terminal Order Formats in a 
Manual and the contents of this Manual are hereby incorporated in these 
Rules and will have full force and effect as if fully set forth herein.
    .04 Stop-limit orders as defined in Rule 6.53(c)(iv) are exempt 
from the requirements of paragraph (a) of this Rule until December 11, 
2003, or such earlier date as the Exchange's order routing and 
execution systems have the functionality to handle stop-limit orders.
    .05 Accommodation liquidations as described in Rule 6.54 are exempt 
from the requirements of paragraph (a) of this Rule.
* * * * *

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 proposes this amendment to its current rules to comply 
with the requirement to implement COATS. The Exchange is submitting the 
proposed rule change to CBOE Rule 6.24 in connection with subparagraph 
IV.B.e(v) of the Commission's Order,\5\ which requires the options 
exchanges to design and implement COATS to ``incorporate into the audit 
trail all non-electronic orders (such that the audit trail provides an 
accurate, time-sequenced record of electronic and other orders, 
quotations and transactions on such respondent exchange, beginning with 
the receipt of an order by such respondent exchange and further 
documenting the life of the order through the process of execution, 
partial execution, or cancellation of that order * * *'' (``Phase V'').
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    \5\ Id.
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    In order to assure that all non-electronic orders are incorporated 
into COATS for Phase V, the proposed rule change would amend CBOE Rule 
6.24, which currently requires orders to be in written form. The 
proposed rule change would require that each order, change to

[[Page 47118]]

an order, or cancellation of an order transmitted to the Exchange must 
be ``systematized'', in a format approved by the Exchange, either 
before it is sent to the Exchange or immediately upon receipt on the 
floor of the Exchange.\6\
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    \6\ CBOE notes that the execution or partial execution of an 
order has been incorporated into COATS in Phase II, and as described 
in Paragraph II of the formal COATS Plan that the options exchanges 
previously have provided to the Commission.
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    Each order, change to an order, or cancellation of an order may be 
systematized in one of two ways. If an order, change to an order, or 
cancellation of an order is sent electronically to the Exchange, it is 
systematized. Alternatively, if an order, change to an order, or 
cancellation of an order is input electronically into the Exchange's 
systems immediately upon receipt on the Exchange, it is systematized.
    The Exchange believes that the systematization requirement may be 
fulfilled in practice in a number of ways. The key is that the order 
must be systematized when the order is routed to the floor for 
execution. For example, under the proposed rule change, an order would 
meet the requirements of the rule if a floor broker in the trading 
crowd received an order over the phone and at the same time had a 
person from his or her booth input the order electronically. The 
requirements of the rule also would be satisfied if someone from the 
upstairs trading desk called a floor broker in the trading crowd on the 
floor with an order, while a clerk at the upstairs trading desk was 
simultaneously sending the order to the floor electronically. While it 
is possible that the floor broker in each of these situations would 
receive and begin the representation of the order prior to the arrival 
of the electronic order, the order entered electronically would be 
entered and routed in a manner consistent with the record keeping 
obligations and the requirements of COATS.\7\
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    \7\ The Exchange recognizes the need for effective and proactive 
surveillance for activities such as trading ahead and front-running. 
It currently conducts automated surveillance for such activities and 
will incorporate a review of order systemization as part of such 
surveillance. The Exchange also intends to implement supplementary 
surveillance and examination programs related to the systemization 
of orders requirement promptly after this requirement is instituted, 
which are designed to address, among other things, trading ahead and 
front-running.
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    Currently, the deadline to implement Phase V of COATS is August 29, 
2003.\8\ The Exchange intends to make the proposed changes to CBOE Rule 
6.24 effective not later than August 29, 2003, or such later date as 
authorized in writing by the Directors of the Commission's Division of 
Market Regulation, Division of Enforcement, and the Office of 
Compliance, Inspections and Examinations.
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    \8\ On June 10, 2003, the Directors of the Commission's Division 
of Market Regulation, Office of Compliance Inspections and 
Examinations, and Division of Enforcement granted CBOE and the other 
floor-based options exchanges an extension of time until August 29, 
2003, to implement Phase V of COATS.
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    Under the proposed change to Interpretation and Policy .04, the 
Exchange proposes to exempt from the systematization requirement stop-
limit orders as defined in CBOE Rule 6.53(c)(iv) until December 11, 
2003, or such earlier time as the Exchange's order routing and 
execution systems (such as COMPASS, ORS, PAR) have the functionality to 
handle stop-limit orders. The Exchange represents that stop-limit 
orders as defined in CBOE Rule 6.53(c)(iv) represent a very small 
percentage of the types of orders sent to and executed on the Exchange. 
The Exchange has an active systems project that will provide the 
functionality to handle stop limit orders in its order routing and 
execution systems.\9\
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    \9\ In their June 10, 2003, letter to the Exchange, the 
Directors of the Commission's Division of Market Regulation, Office 
of Compliance Inspections and Examinations, and Division of 
Enforcement also granted CBOE an extension of time until December 
11, 2003, so that CBOE can modify its order routing and execution 
systems such that they would have the functionality to handle stop-
limit orders.
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    The proposed rule change would also permit the Exchange to exempt 
from the systematization requirement non-multiply listed index option 
classes and other option classes traded exclusively on the Exchange 
other than equity option classes (``exempt classes''). For example, the 
Exchange could exempt from the systematization requirement the 
following option classes traded exclusively on the Exchange: the 
Standard & Poor's 100[reg] index option class (OEX), the Standard & 
Poor's 100[reg] index option class (SPX), options on the Dow Jones 
Industrial Average\SM\ (DJX), and options on the Diamonds[reg] (DIA). 
Equity option classes traded solely on the Exchange would not be 
exempted from the systematization requirement. Orders in exempt classes 
would be required to be in a legible written form approved by the 
Exchange. This proposed change is consistent with the current practice 
permitted under CBOE Rule 6.24.
    The proposed rule change would also keep the current Interpretation 
and Policy .02(a) of CBOE Rule 6.24, which permits the use of hand 
signal communications on the floor to, among other things, initiate an 
order, cancel an order or to change material terms of an order provided 
that such communications are immediately thereafter relayed in written 
form, except in certain classes exempted by the Exchange. The proposed 
rule change would require that such communications be relayed 
immediately in electronic form rather than written form, unless an 
option class is exempted from this requirement. Currently, as provided 
in Interpretation and Policy .02(b) of CBOE Rule 6.24, the Exchange 
exempts the OEX, SPX, and DJX option classes, which are non-multiply 
listed index option classes. The Exchange proposes to amend 
subparagraph (b) of Interpretation .02 to state it may exempt non-
multiply listed index and other option classes traded exclusively on 
the Exchange other than equity option classes under this 
Interpretation. The Exchange will publish via regulatory circular those 
options classes that it has exempted under Interpretation .02.
    Finally, the Exchange has added a new Interpretation and Policy .05 
to CBOE Rule 6.24, which states that accommodation liquidations as 
defined in CBOE Rule 6.54 are exempted from the systematization 
requirement.
2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with 
section 6(b) of the Act \10\ in general and furthers the objectives of 
Section 6(b)(5) \11\ 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. The proposed 
rule change will promote just and equitable principles of trade and 
protect investors and the public interest by electronically enhancing 
the audit trail for orders by incorporating orders into COATS. This 
enhanced audit trail will permit CBOE to conduct surveillance of the 
activity on the Exchange and reconstruct markets in a more efficient 
and effective manner.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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.

[[Page 47119]]

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 in the Commission's Public Reference Section. 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-2003-18 and should be submitted by August 28, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20126 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P