[Federal Register Volume 69, Number 97 (Wednesday, May 19, 2004)]
[Notices]
[Pages 28958-28959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11309]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49699; File No. SR-CBOE-2003-42]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving a Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 Relating to the 
Retail Automatic Execution System

May 13, 2004.
    On October 1, 2003, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change regarding the execution of 
certain broker-dealer orders. The proposed rule change was published 
for comment in the Federal Register on November 7, 2003.\3\ The 
Commission received no comment letters on the proposal. On May 5, 2004, 
the CBOE filed Amendment No. 1 to the proposed rule change.\4\ This 
order approves the proposed rule change, as amended. The Commission 
also seeks comment on Amendment No. 1 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48721 (October 30, 
2003), 68 FR 63158.
    \4\ See letter from Angelo Evangelou, Attorney, CBOE, to Kelly 
Riley, Assistant Director, Division of Market Regulation, 
Commission, dated May 4, 2004 (``Amendment No. 1''). In Amendment 
No. 1, the CBOE modified the proposed rule change by providing that 
neither proprietary orders of an Order Entry Firm that submitted a 
customer order for placement on the limit order book, orders from 
any firm affiliated with the Order Entry Firm, nor orders solicited 
by the Order Entry Firm from members or non-member broker-dealers 
may execute (automatically or otherwise) against the customer limit 
order unless the customer limit order is exposed on the book for at 
least thirty (30) seconds. In addition, the CBOE amended the 
proposed rule change to provide that it be adopted as a pilot 
program ending on November 30, 2004.
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I. Description of the Proposal

    The CBOE proposes to amend CBOE Rule 6.8, Interpretation and Policy 
.01, to allow broker-dealer orders that are eligible for execution on 
CBOE's Retail Automatic Execution System (``RAES'') to execute 
automatically against limit orders on the CBOE book in classes 
designated by the appropriate Floor Procedure Committee. The proposed 
rule change would permit broker-dealer orders to execute automatically 
against customer limit orders on the book provided that such customer 
orders are at the national best bid or offer (``NBBO''). However, the 
proposed rule change provides that proprietary orders of an Order Entry 
Firm or its affiliates, or orders solicited by the Order Entry Firm 
from members or non members (collectively, ``Order Entry Firm 
Orders''), may not automatically execute against a customer limit order 
on the limit order book that was placed on the book by the Order Entry 
Firm unless the customer order has been exposed on the book for at 
least thirty seconds. Finally, the proposed rule change specifies that 
it shall be a violation of the proposed rule for any Exchange member or 
member organization to be a party to any arrangement designed to 
circumvent the proposed rule by allowing a customer, member, member 
organization or non-member broker-dealer to execute immediately against 
agency orders delivered to the Exchange whether such orders are 
delivered via the CBOE ORS system or represented in the trading crowd.

II. Discussion

    The Commission finds that the proposed rule change, as amended by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \5\ and, in particular, the requirements of section 6 of the 
Act \6\ and the rules and regulations thereunder. Specifically, the 
Commission believes that the proposed rule change is consistent with 
section 6(b)(5) of the Act,\7\ which, among other things, requires that 
the CBOE's rules be designed to promote just and equitable principles 
of trade, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \5\ In approving this proposed rule change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission anticipates that the ability for broker-dealer 
orders on RAES to execute against customer limit orders on the book 
should help to provide faster execution of both eligible broker-dealer 
orders and eligible customer limit orders, while reducing the burden on 
the Exchange's members to manually execute these orders. The Commission 
believes that the proposal should benefit customers using the RAES 
system, as well as customers whose orders are residing in the 
Exchange's customer limit order book. Moreover, the Commission finds 
that the proposed rule change that requires a customer limit order to 
be exposed on the book for 30 seconds before an Order Entry Firm Order 
can execute against it addresses the concern that Order Entry Firms 
could use this proposed rule change to internalize or cross orders. The 
Commission notes that CBOE represented that it has developed a 
surveillance procedure to enforce compliance with this provision by its 
members.
    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Amendment No. 1 contains the proposed 
language relating to the thirty-second exposure of customer limit 
orders on the book. In

[[Page 28959]]

addition, Amendment No. 1 requests that the proposed rule change be 
approved as a pilot until November 30, 2004. The thirty-second exposure 
of customer limit orders, contained in Amendment No. 1, is intrinsic to 
the proposed rule change's safeguards against internalization. Further, 
Amendment No. 1 provides that it shall be a violation of CBOE Rule 6.8 
to circumvent the exposure requirement set forth in the proposed rule 
change, thereby providing CBOE with a means for addressing 
inappropriate executions prior to the expiration of the thirty-second 
exposure requirement, consistent with the protection of investors and 
the public interest. Accordingly, the Commission believes that there is 
good cause, consistent with section 19(b) of the Act,\8\ to approve 
Amendment No. 1 to the proposal on an accelerated basis.
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    \8\ 15 U.S.C. 78s(b).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the proposed rule change, 
including whether Amendment No. 1 is consistent with the Act. Comments 
may be submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2003-42 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2003-42. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to Amendment No. 1 to the proposed 
rule change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 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, 450 Fifth Street, NW., Washington, DC 20549-
0609. Copies of such filing also will be available for inspection and 
copying at the principal office of the CBOE. All comments received will 
be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2003-42 and should be submitted on 
or before June 9, 2004.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-CBOE-2003-42) is 
hereby approved, and Amendment No. 1 is approved on an accelerated 
basis, on a pilot basis until November 30, 2004.

    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11309 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P