[Federal Register Volume 68, Number 157 (Thursday, August 14, 2003)]
[Notices]
[Pages 48650-48652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20696]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48293; File No. SR-CBOE-2002-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to Permanent Approval of the Rapid Opening 
System

August 6, 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 September 16, 2002, 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, II, and III below, which Items have been prepared by the CBOE. 
On February 6, 2003, CBOE 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78(s)(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Jaime Galvan, Attorney II, Legal Division, 
CBOE, to Terri Evans, Assistant Director, Division of Market 
Regulation, dated January 17, 2003 (``Amendment No. 1''). In 
Amendment No. 1, CBOE described its plans to incorporate the 
AutoQuotes sent into its Rapid Open System (``ROS'') by market 
makers into its illegal quote width surveillance program; explained 
how the implementation of Phase V of the Consolidated Options Audit 
Trail plan would facilitate the Exchange's efforts at monitoring 
activities on ROS; provided greater detail regarding the 
observations of ROS openings conducted by Exchange staff during the 
pilot period; and made minor changes to its discussion section.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to adopt ROS on a permanent basis.\4\ The text of the 
proposed rule change appears below. Deleted text is in brackets.
---------------------------------------------------------------------------

    \4\ CBOE also proposed to extend the ROS pilot program. However, 
on September 25, 2002, CBOE submitted another proposal to extend the 
ROS pilot program, which replaced and superseded the portion of SR-
CBOE-2002-55 that proposed to extend the ROS pilot program. This 
proposal was effective upon filing. See Securities Exchange Act 
Release No. 46572 (September 30, 2002), 67 FR 62508 (October 7, 
2002).
---------------------------------------------------------------------------

Rule 6.2A
    (a)-(c) No change.
    [(d) Pilot Program.
    This Rule (and the sentences in Rule 6.2 and Rule 6.45 referring to 
this Rule) will be in effect until September 30, 2002 on a pilot 
basis.]
    * * * Interpretation and Policies:
    .01-.02 Unchanged.
* * * * *

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

    In its filing with the Commission, 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. 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 February 9, 1999, the Commission approved, on a pilot basis, the 
implementation of ROS.\5\ ROS is a system developed by the Exchange to 
open an entire options class, all series, as a single event, based on a 
single underlying value. The ROS pilot program is due to expire on 
September 30, 2003.\6\ The Exchange proposes to make the ROS pilot 
program permanent.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 41033 (February 9, 
1999), 64 FR 8156 (February 18, 1999) (``Pilot Program Approval 
Order''). ROS is governed by CBOE Rule 6.2A.
    \6\ The Commission has extended the ROS pilot program five 
times. See Securities Exchange Act Release Nos. 42596 (March 30, 
2000), 65 FR 18397 (April 7, 2000) (extending the pilot program 
until September 30, 2000); 43395 (September 29, 2000), 65 FR 60706 
(October 12, 2000) (extending the pilot program until September 30, 
2001), 44891 (October 1, 2001), 66 FR 51483 (October 9, 2001) 
(extending the pilot program until September 30, 2002); 46572 
(September 30, 2002), 67 FR 62508 (October 7, 2002) (extending the 
pilot program until March 31, 2003; and 47573 (March 26, 2003), 68 
FR 15780 (April 1, 2003) (extending the pilot program until 
September 30, 2003).
---------------------------------------------------------------------------

    CBOE represents that ROS has successfully facilitated expedited 
openings of options classes on the Exchange, thereby improving market 
efficiency for all market participants. CBOE represents that ROS has 
provided the Exchange's market-makers with the ability to open option 
classes within seconds of the opening of the underlying security. CBOE 
represents that by entering into open trading more quickly using ROS, 
customer orders have been addressed in open trading in a more timely 
manner. CBOE represents that ROS has also prevented large numbers of 
orders from queuing on the Exchange's book and live ammo screens 
immediately after the opening, thus, providing the order book official 
and designated primary market maker staff with the ability to handle 
the orders in a more expeditious manner.
    In the Pilot Program Approval Order, the Commission requested that 
the Exchange study certain issues during the pilot program and produce 
a report to the Commission addressing those issues prior to seeking 
permanent approval of ROS. CBOE represents that the issues raised by 
the Commission were the following: (1) How and when market-makers set 
ROS risk and size thresholds, (2) how often such thresholds are 
exceeded and result in the adjustment of AutoQuote,\7\ (3) the effect 
of AutoQuote adjustments on the quality of customer executions, (4) any 
effects on existing order execution priority, and (5) the handling of 
and adjustments made for non-bookable orders. CBOE represents that 
prior to the submission of this proposed rule change, the Exchange 
submitted a report

[[Page 48651]]

to the Commission addressing each of these issues in depth (``ROS 
Study'').
---------------------------------------------------------------------------

    \7\ Under Interpretation .02 to CBOE Rule 6.2A, the term 
``AutoQuote'' means either the Exchange's AutoQuote system or a 
proprietary autoquote system operated by a member of the trading 
crowd where the particular ROS class is traded.
---------------------------------------------------------------------------

    With respect to issues 1 and 2, the Exchange represents that it has 
observed that in general, market-makers have set the contract and delta 
thresholds on ROS at a level which ensures that an options class that 
has orders to trade will not auto-open, in order to avoid openings 
based on erroneous prints in the underlying security or delayed updates 
to bid/ask information on underlying securities. Nonetheless, the 
Exchange represents that it has still been able to open classes within 
seconds of the opening of the underlying class because ROS can open 
classes very quickly even if they are not set to auto-open. CBOE 
represents that based on Exchange staff observations of ROS openings 
during the pilot period, AutoQuote adjustments by market-makers after 
the ``lock'' is initiated are rare.
    With respect to issue 3, the Exchange believes that market-maker 
adjustments to AutoQuote have had no adverse effect on the quality of 
customer executions. In fact, CBOE represents that AutoQuote 
adjustments are made to ensure the accurate pricing of options based on 
the opening price of the underlying security. Market-makers are 
required to price contracts in a manner consistent with their 
obligations under CBOE Rule 8.7(b)(iv). The Exchange has published 
regulatory circulars to remind market makers of their obligation to set 
AutoQuote in accordance with Exchange rules.\8\ CBOE believes that 
scrutiny by customers and firms is another factor that ensures that 
market-makers adjust AutoQuote values consistent with their obligation.
---------------------------------------------------------------------------

    \8\ See CBOE Regulatory Circulars RG99-91 (April 14, 1999) and 
RG02-34 (May 28, 2002).
---------------------------------------------------------------------------

    The Exchange represents that it has submitted along with the ROS 
Study a written description of the methods employed by the Exchange to 
surveil market-maker activities on ROS. The Exchange believes that 
other than the situation where ROS has opened based on an incorrect 
underlying value, there have been no customer complaints regarding ROS 
opening prices.
    With respect to issue 4, the Exchange believes that ROS has served 
to protect the quality of executions received by non-bookable orders 
that participate in the opening. The Exchange has developed a procedure 
for including non-bookable orders (firm, broker-dealer and customer 
contingency orders) into the opening process. CBOE represents that this 
procedure has been incorporated into CBOE Rule 6.2A and has been 
detailed in two regulatory circulars.\9\ The Exchange believes ROS has 
enhanced the quality of customer executions and has served to provide 
non-bookable orders represented before the open with the executions 
that they deserve on the opening. CBOE represents that as is 
demonstrated by the statistics in the ROS Study, during the review 
period noted, the vast majority of orders that traded during the 
``opening period'' (defined as the ROS opening plus the first minute 
after the ROS opening) received the ROS opening price or better.\10\
---------------------------------------------------------------------------

    \9\ See CBOE Rule 6.2A(ii), and Regulatory Circulars RG99-35 
(February 10, 1999) and RG00-40 (March 13, 2000).
    \10\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    The Exchange represents that it is committed to ensuring that non-
bookable orders that participate on the opening continue to receive 
quality executions. The Exchange represents that the implementation of 
the requirement under Phase V of the Consolidated Options Audit Trail 
(``COATS'') Plan that all non-electronic orders must be captured 
electronically for audit trail purposes will facilitate the Exchange's 
efforts in monitoring on an ongoing basis the executions received by 
non-bookable orders that participate in the opening. \11\ CBOE 
anticipates that after the implementation of COATS Phase V, a non-
bookable order sent to the Exchange prior to the opening will be 
captured electronically and incorporated into the Exchange's audit 
trail. CBOE believes this will facilitate its regulatory staff's 
ability to investigate with more speed and efficiency any complaint 
regarding the execution received by a non-bookable order on the 
opening, in that the Exchange will now have an electronic record of the 
time of receipt of the order, in addition to the order information and 
the execution price of the order.\12\
---------------------------------------------------------------------------

    \11\ The COATS Plan is a plan that the options exchanges are 
required to submit to the Commission in order to comply with Section 
IV.B.e. of the Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. See In the Matter 
of Certain Activities of Options Exchanges, Securities Exchange Act 
Release No. 43268, September 11, 2000; Administrative Proceeding 
File No. 3-10282.
    \12\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    With respect to issue 5, the Exchange represents that it has 
observed that firms consistently wait until after the ROS opening has 
been completed to represent non-bookable orders. CBOE believes that by 
waiting until after ROS opens, the firms have a better sense of where 
they may trade the order after opening quotes have been disseminated. 
CBOE represents that the statistics in the ROS Study demonstrate that 
few, if any, non-bookable orders are being represented before ROS 
openings. The Commission stated in the Pilot Program Approval Order 
that prior to considering permanent approval of ROS, it expected the 
Exchange to develop a workable plan for electronic incorporation of 
non-bookable orders on ROS. The Exchange believes, for the reasons set 
forth above, that permanent approval of ROS should not be contingent 
upon the development of a plan to electronically incorporate non-
bookable orders on ROS. CBOE believes that such a systems change would 
have very little impact on ROS trading due to the fact that non-
bookable orders are virtually non-existent before the open. The 
Exchange represents that it continues to consider modification of EBook 
to include other order types, but it is uncertain at this time when 
such a project might be completed.
    Based on the successful operation of ROS over the past three years, 
the Exchange proposes that the Commission approve ROS on a permanent 
basis.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\13\ in general, and furthers the 
objectives of Section 6(b)(5),\14\ in particular, in that it is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest, because ROS has improved 
market efficiency for all market participants by successfully 
facilitating expedited openings of options classes on the Exchange 
during the pilot period.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 
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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i)

[[Page 48652]]

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 proposal, 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 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-2002-55 and should be 
submitted by September 4, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary,
[FR Doc. 03-20696 Filed 8-13-03; 8:45 am]
BILLING CODE 8010-01-P