[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40759-40760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3745]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51992; File No. SR-CBOE-2005-24]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change Relating to the 
Assignment of RAES Orders to Logged-In Market-Makers Participating on 
RAES

July 7, 2005.

I. Introduction

    On March 15, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ 
and Rule 19b-4

[[Page 40760]]

thereunder,\2\ to add an alternative to the current procedures that 
apply to the assignment of orders on the Exchange's Retail Automatic 
Execution System (``RAES'') to CBOE market-makers logged on to 
participate in RAES. The proposed rule change was published for comment 
in the Federal Register on May 18, 2005.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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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. 51684 (May 11, 
2005), 70 FR 28588.
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II. Description of the Proposal

    CBOE Rule 6.8 governs the execution of orders on RAES. CBOE Rule 
6.8.06 sets forth alternatives available to the appropriate Floor 
Procedure Committee to implement the procedures for the assignment of 
RAES-eligible orders to CBOE market-makers logged onto RAES for 
execution. One alternative set forth in current Rule 6.8.06(c), the 
``100 Spoke RAES Wheel,'' assigns RAES orders to logged-in market-
makers based on the percentage of their in-person agency contracts 
traded in that class (excluding RAES contracts traded) compared to all 
of the market-maker in-person agency contracts traded (excluding RAES 
contracts) during the review period. The proposed rule change sets 
forth a new alternative, available only in index option classes, that 
offers a wheel with 1000 spokes and assignment procedures that are 
similar to the assignment procedures applicable to the 100 Spoke RAES 
Wheel.
    Under the proposed 1000 Spoke RAES Wheel, the appropriate Floor 
Procedure Committee will determine on a class-by-class basis whether 
the assignment of RAES orders to logged-in market-makers is based on 
the percentage of a market-maker's contracts traded in that index 
option class (excluding RAES contracts traded) compared to all market-
maker contracts traded (excluding RAES contracts) during the review 
period, or the percentage of the market-maker's in-person agency 
contracts traded in that class (excluding RAES contracts traded) 
compared to all market-maker in-person agency contracts traded 
(excluding RAES contracts) during the review period. As is the case 
with the 100 Spoke RAES Wheel, the procedure for the 1000 Spoke RAES 
Wheel would provide that on each revolution of the wheel, each 
participating market-maker who is logged in RAES at the time will be 
assigned a number of contracts that approximates the percentage of 
contracts on RAES that the market-maker traded in-person in that index 
option class during the review period, subject to the restrictions set 
forth in current Rule 6.8.06(c).
    The effect of utilizing the 1000 Spoke RAES Wheel instead of the 
100 Spoke RAES Wheel is that the number of contracts allocated to a 
market-maker will increase by a factor of 10 for every revolution of 
the RAES wheel. This procedure is designed to reduce the rounding 
effects that result under the 100 Spoke RAES Wheel (the RAES system 
configuration rounds contracts to the nearest whole number).

III. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b) of the 
Exchange Act \4\ and the rules and regulations thereunder applicable to 
a national securities exchange.\5\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Exchange Act,\6\ which requires, among other things, that the 
Exchange's rules be designed to promote just and equitable principles 
of trade, to prevent fraudulent and manipulative acts and, in general, 
to protect investors and the public interest.
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    \4\ 15 U.S.C. 78f(b).
    \5\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to add the alternative of 
the 1000 Spoke RAES Wheel would provide the Exchange with a greater 
degree of flexibility in allocating index option contracts that are 
executed automatically through RAES. The Exchange initially developed 
the 100 Spoke RAES Wheel as a means to allocate contracts executed 
through RAES according to the liquidity each market-maker provided on 
the floor. The Exchange asserted in its proposal, however, that the 
Floor Procedure Committees for index options have not employed the 100 
Spoke RAES Wheel alternative because of the effects of rounding of that 
allocation method in larger trading crowds. The Commission believes 
that, with the 1000 Spoke RAES Wheel alternative, market-makers in 
index options would have a greater incentive to compete effectively for 
orders, and this, in turn, should benefit investors and promote the 
public interest.
    The Commission notes that implementation of the 1000 Spoke RAES 
Wheel, as with the 100 Spoke RAES Wheel, will have no effect on the 
prices offered to customers. Under CBOE Rule 6.8(d)(i), RAES 
automatically provides to each retail customer order an execution 
price, generally determined by the prevailing market quote at the time 
of the order's entry into the system. The 1000 Spoke RAES Wheel simply 
provides for another method of contract allocation in the case of index 
option contracts automatically executed through RAES.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\7\ that the proposed rule change (SR-CBOE-2005-24) be, 
and it hereby is, approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3745 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P