[Federal Register Volume 70, Number 10 (Friday, January 14, 2005)]
[Notices]
[Pages 2682-2684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-135]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51003; File No. SR-CBOE-2005-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated, Relating to Allowing Market Participants To 
Submit Orders for Automatic Execution

January 10, 2005.
    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 December 31, 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 Exchange. 
The Exchange filed the proposal as a ``non-controversial'' proposed 
rule change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder.\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to allow market participants to submit orders for 
automatic execution. The text of the proposed rule change is available 
at the Office of the Secretary, CBOE and at the Commission.

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 statutory basis for, the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of those 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 aspects of 
such statements.

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

1. Purpose
    When CBOE market participants \5\ interact with orders in the 
electronic book (``the book'' or ``E-book''), CBOE Rule 6.45A(c) 
governs the allocation of such orders.\6\ Generally, if only one market 
participant (``MP'') interacts with the order in the book, he/she will 
be entitled to receive the entire order. If, however, more than one MP 
attempts to interact with the same order in the book, a ``quote 
trigger'' process initiates. Under the quote trigger process, the first 
MP to interact with the book order starts a counting period lasting N-
seconds whereby each MP that submits an order within that ``N-second 
period'' becomes part of the ``N-second group'' and is entitled to 
share in the allocation of that order via the formula contained in the 
rule. The Exchange proposes to provide an alternative method by which 
MPs may interact with orders in the book.
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    \5\ Per CBOE Rule 6.45A, the term market participants includes 
an in-crowd Market-Maker, a Market-Maker complying with the in-
person requirements of CBOE Rule 8.7.03(B)(1) who submits quotes 
from off of the floor of the Exchange through the facilities of the 
Exchange, an in-crowd DPM, an e-DPM, and a floor broker representing 
orders in the trading crowd.
    \6\ Market participants currently interact with orders in the 
book in one of two ways: by submitting a quote or by submitting an 
order. Such orders are referred to as ``I-orders.''

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[[Page 2683]]

    As proposed, MPs will have the ability to submit orders that will 
be eligible to execute automatically against resting orders in the 
book. As such, execution will be based on time priority such that the 
first order, whether from a MP, a customer, or broker-dealer, will have 
priority for up to the size of his/her order. Subsequent orders will be 
entitled to allocations only to the extent the first order did not 
exhaust the size of the order in the book. CBOE Rule 6.13 governs 
orders submitted for automatic execution and orders submitted by MPs 
would be subject to these requirements. Orders submitted by MPs that 
are CBOE Market-Makers (``MMs'') will be treated as orders from 
``Options Exchange Market-Makers,'' as defined in CBOE Rule 
6.13(b)(i)(C)(ii)(A), and therefore will be subject to the same 
restrictions imposed by CBOE Rule 6.13(b)(i)(C)(iii), which generally 
limits all options exchange MMs (whether CBOE or away MMs) to one 
execution (on the same side of the market) per 15-seconds.\7\
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    \7\ CBOE Rule 6.13(b)(i)(C)(iii) provides: ``With respect to 
orders eligible for submission pursuant to paragraph (b)(i)(C)(ii), 
members shall neither enter nor permit the entry of multiple orders 
on the same side of the market in an option class within any 15-
second period for an account or accounts of the same beneficial 
owner. The appropriate FPC may shorten the duration of this 15-
second period by providing notice to the membership via a Regulatory 
Circular that is issued at least one day prior to implementation. 
The effectiveness of this rule shall terminate on January 12, 
2005.'' The Exchange has proposed to extend the effectiveness of 
this Rule until October, 2005. The Exchange represents that it has 
the ability to surveil for violations of this rule by CBOE MPs.
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    Upon implementation of this new rule, CBOE MMs will have two 
alternative methods by which they can access orders in the book.\8\ One 
will be through the use of I-orders (with allocation via the ``N-second 
group'' as described above) and the other will be through the use of an 
order submitted for automatic execution (with allocation based on time 
priority). CBOE MMs may choose which method they want to utilize to 
send in orders. Functionally, the vast majority of MMs will have one 
handheld device through which they submit either an I-order or an order 
for automatic execution.\9\ Upon approval of this rule, MMs could 
choose to submit two orders simultaneously.\10\ For example, a MM may 
submit an order for automatic execution immediately followed by an I-
order. In this respect, if the MM's auto-ex order is first, he/she will 
receive an execution. If, however, the MM is not first and instead was 
``beaten'' to the order by another CBOE MM, the first MM may still 
participate in the order by virtue of sending in the I-order.
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    \8\ Floor brokers already have this dual ability with respect to 
orders they represent as agent. They may choose to submit the order 
for automatic execution (in accordance with CBOE Rule 6.13) or they 
may determine to join the ``N-second group.'' Away MMs, too, have 
the ability to submit orders for automatic execution (in accordance 
with CBOE Rule 6.13) or they may have a floor broker represent their 
orders as part of the ``N-second group.''
    \9\ The routing of the order the MM submits is dictated by the 
way the MM marks the order. An order designated with an ``I'' origin 
code routes directly to the book and participates in the ``N-second 
group.'' An order submitted for automatic execution by a MM will be 
marked with an ``M'' origin code and will route through ORS where it 
executes in accordance with Rule 6.13.
    \10\ CBOE has confirmed that the limit on sending more than one 
order within 15 seconds in CBOE Rule 6.13(b)(i)(C)(iii), as 
described in fn. 7 supra, only applies to auto-ex orders. Hence, a 
MP could send two orders simultaneously as long as one of them is 
sent as an I-order. Telephone conversation between Deborah L. Flynn, 
Assistant Director, Division of Market Regulation, Commission and 
Steve Youhn, Assistant Secretary, CBOE on January 5, 2005.
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    With respect to priority between the two types of orders, the first 
order received by the Exchange has priority over the other. For 
example, assume two MMs in the trading crowd both attempt to execute 
against an order in the book by sending in different types of orders. 
MM A sends an I-order while MM B sends an order for automatic 
execution. The first order received by the Exchange has priority. If it 
is the I-order, then the order submitted by the MM B for automatic 
execution will only execute to the extent there is a balance remaining 
after the I-order executes.\11\ If the auto-ex order is received first, 
then the I-order submitted by MM A will only execute to the extent 
there is a balance remaining after the auto-ex order executes.\12\ An 
order submitted by a MM for automatic execution will not participate in 
the ``N-second group.''
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    \11\ When the I-order executes against the order in the book, it 
starts the N-second process.
    \12\ If there is a balance remaining against which the I-order 
executes, the N-second process starts again when the I-order 
executes.
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2. Statutory Basis
    The Exchange represents that allowing MMs to submit orders for 
automatic execution in accordance with CBOE Rule 6.13 will enhance 
their ability to provide liquidity and manage risk. Accordingly, CBOE 
believes the proposed rule change is consistent with the Act and the 
rules and regulations under the Act applicable to a national securities 
exchange and, in particular, the requirements of section 6(b) of the 
Act.\13\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \14\ requirement that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts, 
to promote just and equitable principles of trade, to 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78(f)(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. Rather, CBOE believes that the proposed rule 
change will have a positive effect on competition, which is appropriate 
and in furtherance of the purposes of the Act. Specifically, the 
proposal would allow CBOE MMs to have the ability to be first with 
respect to executing against a booked order, which entitles them to 
receive all of that order (up to the size of the order the MM submits). 
Currently, the only way a MM can take 100% of a booked order is if no 
other market participant submits an order during the ``N-second'' 
period. The Exchange believes that the ability to receive a larger 
allocation will serve as an incentive to a MM to make more vigorous 
markets. The Exchange believes that the proposal also puts CBOE MMs on 
equal footing with their away-market counterparts, who have the ability 
to submit orders to CBOE for automatic execution. For these reasons, 
CBOE believes that the proposal will have a significantly positive 
effect on competition.

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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A)(iii) of the 
Act \15\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\16\ The 
Exchange represents that the foregoing rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms, does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of

[[Page 2684]]

investors and the public interest. The Exchange has requested that the 
Commission waive the five-day pre-filing notice requirement and the 30-
day operative delay period for ``non-controversial'' proposals and make 
the proposed rule change effective and operative upon filing.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6).
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    The Commission has determined to waive the five-day pre-filing 
notice requirement and the 30-day operative delay period.\17\ The 
Commission notes that the proposal would only give CBOE market makers 
the option of sending their proprietary orders for automatic execution, 
an option that other CBOE market participants already enjoy. For this 
reason, the Commission sees no reason to delay the operation of the 
proposed change. Therefore, the foregoing rule change has become 
immediately effective and operative upon filing pursuant to Section 
19(b)(3)(A)(iii) of the Act \18\ and Rule 19b-4(f)(6) thereunder.\19\
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    \17\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\20\
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    \20\ See 15 U.S.C. 78s(b)(3)(C).
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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 an e-mail to [email protected]. Please include 
File Number SR-CBOE-2005-01 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-2005-01. 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 
Exchange. 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-2005-01 and should be submitted on or before February 4, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-135 Filed 1-13-05; 8:45 am]
BILLING CODE 8010-01-P