[Federal Register Volume 69, Number 224 (Monday, November 22, 2004)]
[Notices]
[Pages 67971-67972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3275]



[[Page 67971]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50673; File No. SR-CBOE-2004-52]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated To Amend Its ``Trigger'' Rule To Permit RAES 
Orders To Automatically Execute Against Orders Resting on the 
Exchange's Limit Order Book

November 16, 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 July 30, 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, II, and III below, which items have been prepared by the CBOE. 
The CBOE submitted Amendment No. 1 to the proposal on September 23, 
2004.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change 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 David Doherty, CBOE, to Nancy J. Sanow, 
Assistant Director, Division of Market Regulation, Commission, dated 
September 22, 2004 and accompanying Form 19b-4 (``Amendment No. 
1''). Amendment No. 1 replaced and superceded the original filing in 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 proposes to amend its ``Trigger'' rule (CBOE Rule 
6.8(d)(v)) to permit RAES orders to automatically execute against 
orders resting on the Exchange's limit order book. Below is the text of 
the proposed rule change. Proposed additions are italicized; proposed 
deletions are [bracketed].
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Chapter VI--Doing Business on the Exchange Floor

* * * * *

Rule 6.8 RAES Operations

    (a)-(d)(iv) No change.
    (d)(v) Notwithstanding sub-paragraph (d)(iv), for classes of 
options as determined by the appropriate Floor Procedure Committee 
(``FPC''), for any series of options where the bid or offer generated 
by Autoquote (Exchange or proprietary) is equal to or crosses the 
Exchange's best bid or offer as established by an order in the 
Exchange's limit order book, orders in the book for options of that 
series will be automatically executed against participants on RAES 
(``Trigger'') up to a size not to exceed the number of contracts equal 
to the applicable maximum size of RAES-eligible orders for that series 
of options (``Trigger Volume''). The appropriate FPC is responsible for 
determining the Trigger Volume for a particular series of options. In 
the event a member in the trading crowd verbally initiates a trade with 
a book order prior to the time the book staff announces to the trading 
crowd that the order has been removed from the book by Trigger, the 
book staff will manually endorse the book order to that member(s). In 
the event the order in the book is for a larger number of contracts 
than the applicable Trigger Volume, the balance of the book order may 
be executed manually by the trading crowd. In the limited circumstance 
where contracts remain in the book after an execution (or partial 
execution) of a book order up to the applicable Trigger Volume, the bid 
or offer generated by Autoquote will be one-tick inferior to the price 
of the book order such that the disseminated quote will not cross or 
lock with the Autoquote bid or offer. In addition, where contracts 
remain in the book after an execution (or partial execution) [In these 
instances], or for any series where Trigger has not yet been 
implemented by the appropriate FPC, orders in RAES for options of that 
series may either [will not] be automatically executed [but instead] or 
[will] be rerouted on ORS to the crowd PAR terminal or to another 
location in the event of system problems or contrary firm routing 
instructions, as determined by the appropriate FPC on a class by class 
basis.
* * * * *

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 CBOE included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in item IV below. The 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
    The Exchange proposes to amend CBOE Rule 6.8(d)(v), which governs 
the operation of the Exchange's AutoQuote Triggered Ebook Execution 
System (``Trigger''). The proposed rule change would affect how 
incoming orders submitted through the Exchange's Retail Automatic 
Execution System (``RAES'') are treated at such time a locked or 
crossed market exists.
    Trigger is a system that allows orders resting in CBOE's electronic 
book to be automatically executed in the limited situation where the 
bid or offer for a series of options generated by CBOE's AutoQuote 
system (``AutoQuote''), or any CBOE-approved proprietary quote 
generation system used in lieu of AutoQuote, locks or crosses CBOE's 
best bid or offer for that series as established by such booked orders. 
The Trigger functionality does not apply to options traded on CBOE's 
Hybrid Trading System.
    The current Trigger rule (CBOE Rule 6.8(d)(v)) provides that when 
the quote generated by AutoQuote locks or crosses a resting order in 
the book, the Trigger process is initiated and the book order up to the 
Trigger volume, which is set by the appropriate Floor Procedure 
Committee (``FPC''), is immediately removed from the book and a last 
sale is disseminated. Where any unexecuted balance remains in the book, 
it may be executed manually by the trading crowd or by others. During 
the entire Trigger process, incoming RAES orders do not automatically 
execute, and instead route to the PAR terminal, where the Exchange's 
Designated Primary Market-Maker represents them. As soon as the entire 
book order is removed from the book, the new AutoQuote value, unimpeded 
by a crossed or locked market, is disseminated and RAES again is 
available for automatic executions.
    Under the proposed rule change, incoming RAES orders submitted 
during the Trigger process would be eligible to execute against those 
book orders that are crossed or locked by Autoquote. Specifically, if a 
balance remains on the book after the Trigger volume is removed from 
the book, incoming RAES orders would remain eligible for execution 
against the book order instead of routing to the PAR terminal for 
manual representation. The proposed rule change does not change the 
existing

[[Page 67972]]

process for incoming RAES orders that are submitted prior to a locked 
or crossed market; these orders would continue to be executed in 
accordance with the RAES procedures set forth in CBOE Rule 6.8 (i.e., 
if an order in the Exchange's book constitutes the best bid or offer on 
the Exchange, the incoming RAES order will generally execute against 
the order in the book). The appropriate FPC would implement this 
Trigger enhancement on a class-by-class basis.
    The Exchange believes that by allowing incoming RAES orders 
submitted during a locked or crossed market to be eligible for 
automatic execution, the number of corresponding orders routed to PAR 
for manual handling would decrease. As a result, the Exchange believes 
that the proposed rule change provides public customers with greater 
access to the Exchange's markets and more efficient execution of their 
RAES orders.
2. Statutory Basis
    The CBOE believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\4\ in general, and furthers 
the objectives of Section 6(b)(5),\5\ in particular, in that it should 
promote just and equitable principles of trade and serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the 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) 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 Exchange consents, the Commission will:
    A. By order approve such 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 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 e-mail to [email protected]. Please include File 
Number SR-CBOE-2004-52 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-2004-52. 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, 450 Fifth 
Street, NW., Washington, DC 20549. 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 SR-CBOE-2004-
52 and should be submitted on or before December 13, 2004.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3275 Filed 11-19-04; 8:45 am]
BILLING CODE 8010-01-P