[Federal Register Volume 69, Number 203 (Thursday, October 21, 2004)]
[Notices]
[Pages 61877-61879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2735]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50540; File No. SR-CBOE-2004-57]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Chicago Board Options Exchange, Incorporated Relating 
to the Permanent Approval of Autobook

October 14, 2004.
    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 August 17, 2004, 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 and II below, which items have been prepared by the CBOE. The 
Exchange filed Amendment No. 1 to the proposed rule change on October 
8, 2004.\3\ The Commission is publishing this notice, as amended, to 
solicit comments on the proposed rule change from interested persons 
and to grant accelerated approval to the proposed rule change, as 
amended.
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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 Deborah Flynn, Assistant Director, Division of Market 
Regulation, Commission, dated October 8, 2004 (``Amendment No. 1''). 
Amendment No. 1 amends the proposed rule change by deleting the word 
``all'' in the second sentence of the seventh paragraph in Item 3.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to adopt the Exchange's automated limit order 
display facility (``Autobook'') on a permanent basis. The text of the 
proposed rule change is set forth below. Deletions are in brackets.

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

[[Page 61878]]

approval is obtained. The DPM must obtain such approval no later than 
three minutes after deactivation. [The Autobook Pilot expires on 
October 19, 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.
* * * * *

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 III 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
    Autobook is an enhancement to the Designated Primary Market-Maker's 
(``DPM's'') PAR workstation that automatically facilitates 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. As such, CBOE believes 
that Autobook assists and facilitates DPMs' compliance with their 
regulatory obligation relating to the display of eligible customer 
limit orders that improve the price or increase the size of the best 
disseminated CBOE quote as required by CBOE Rule 8.85(b).
    On April 18, 2003, the Commission approved the implementation of 
Autobook on a one-year pilot basis.\4\ Subsequently, on April 20, 2004, 
the Commission extended the Autobook pilot until October 19, 2004 or 
such earlier time as the Commission has approved Autobook on a 
permanent basis.\5\
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    \4\ See Securities Exchange Act Release No. 47701, 68 FR 22426 
(April 28, 2003) (approving SR-CBOE-2003-16.)
    \5\ See Securities Exchange Act Release No. 49584, 69 FR 22893 
(April 27, 2004) (granting accelerated approval to SR-CBOE-2004-22).
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    The Exchange believes that Autobook has been an effective tool for 
DPMs in that it has assisted DPMs to comply with their regulatory 
obligations relating to the display of eligible customer limit orders 
as required by CBOE rules. Accordingly, CBOE seeks permanent approval 
of Autobook.
    As was previously described in CBOE's rule filing that initiated 
the Autobook pilot, Autobook does not relieve DPMs of their obligations 
to book eligible customer limit orders on their PAR workstations 
immediately per CBOE Rule 8.85.\6\ 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.\7\ The 
Exchange periodically issues regulatory circulars discussing the issue 
of excessive reliance upon Autobook.\8\
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    \6\ 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.'' Securities 
Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 
(September 12, 1996).
    \7\ 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.
    \8\ The Exchange has provided statistics to Commission staff 
that demonstrate that DPMs have not excessively relied upon Autobook 
to display eligible limit orders without attempting to address these 
orders immediately. The Exchange will continue to surveil DPMs for 
excessive reliance on Autobook.
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    Autobook is an exchange-mandated facility that operates only on DPM 
PAR workstations. The appropriate Exchange Committee is 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. The appropriate 
Exchange Committee also has the authority to determine whether to 
utilize Autobook to automatically display any other types of orders 
that are not subject to CBOE's limit order display requirements.
    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.\9\ Floor officials would 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.\10\ The Exchange would document all instances 
where a floor official grants approval.
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    \9\ The Exchange believes that this is consistent with NYSE 
treatment. See Securities Exchange Act Release No. 41386 (May 10, 
1999), 64 FR 26809 (May 17, 1999).
    \10\ The Exchange believes that this is consistent with Amex 
Rule 170, Commentary .10. See Securities Exchange Act Release No. 
42952 (June 16, 2000), 65 FR 39210 (June 23, 2000).
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    The Exchange would continue to conduct surveillance to ensure that 
DPMs comply with their obligation to execute or book all eligible limit 
orders as required by CBOE rules. CBOE also commits to conducting 
surveillance designed to detect whether DPMs as a matter of course rely 
on Autobook to display eligible limit orders. A practice of excessive 
reliance upon Autobook would be reviewed by CBOE's Regulatory Division 
as a possible due diligence violation.
2. Statutory Basis
    Because Autobook assists and facilitates DPMs' compliance with 
their regulatory obligations concerning the display of eligible 
customer limit orders as required by CBOE rules, the Exchange believes 
that the proposed rule change, as amended, is consistent with section 
6(b) of the Act\11\ in general and furthers the objectives of section 
6(b)(5)\12\ in particular in that it is designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest. Furthermore, the Exchange believes that the proposed changes 
are consistent with the requirement that an exchange's rules not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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, as amended, 
will impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 61879]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange neither solicited nor received comments on the 
proposal.

III. 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. 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-2004-57 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-2004-57. 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 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 the 
filing also will be available for inspection and copying at the 
principal offices 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-2004-57 and should be submitted on or before 
November 12, 2004.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the Commission believes that the proposed rule change is 
consistent with the requirements of sections 6(b)(5) of the Act\13\ and 
the objectives of section 11A(a)(1)(c) of the Act.\14\ Section 6(b)(5) 
requires, among other things, that the rules of the Exchange 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.\15\ With respect to section 11A, Congress found that 
it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure the 
availability to brokers, dealers and investors of information with 
respect to quotations for and transactions in securities, and to assure 
the practicability of brokers investing investors' orders in the best 
market.
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78k-1(a)(1)(C).
    \15\ In approving the proposed rule, 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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    Specifically, the Commission believes that the proposed rule change 
should help to ensure the availability of information with respect to 
quotations by assisting DPMs in displaying limit orders in a timely 
fashion. The Commission notes that Autobook is a tool designed to 
ensure that all customer limit orders are displayed no later than 30 
seconds after receipt. Nonetheless, the Commission emphasizes that its 
approval of Autobook on a permanent basis does not relieve DPMs of 
their obligations to immediately display customer limit orders. To that 
end, the Commission expects the Exchange to actively surveil and 
appropriately discipline its members for excessive reliance on this 
tool.
    The Commission finds good cause for accelerating approval of the 
proposed rule change, as amended, prior to the thirtieth day after 
publication in the Federal Register. The Commission notes the substance 
of the proposed rule change has previously been published for public 
comment and no comments were received. The Commission also notes that 
the proposal is substantially similar to the rules of another self-
regulatory organization. In addition, the Commission notes that 
accelerated approval of the proposed rule change will permit the 
continued use, without interruption, of Autobook, the pilot for which 
is scheduled to expire on October 19, 2004. Accordingly, the Commission 
finds good cause, consistent with section 19(b)(2) of the Act,\16\ to 
approve the proposed rule change, as amended, prior to the thirtieth 
day after publication of the notice of filing.
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    \16\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (File No. SR-CBOE-2004-57), as 
amended, is approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2735 Filed 10-20-04; 8:45 am]
BILLING CODE 8010-01-P