34238 Federal Register / Vol. 65, No. 103 / Friday, May 26, 2000 / Notices

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 41599

(July 6, 1999), 64 FR 38058.

4 In Amendment No. 1, the CBOE amended the

text of the rule language to provide notification of

trade adjustments, clarify the trades that can be

adjusted, and limit the time period that trades can

be adjusted to the day when the correction of the

erroneous print occurs. See letter from Timothy

Thompson, Director, Regulatory Affairs, CBOE, to

Terri Evans, Special Counsel, Division of Market

Regulation (‘‘Division’’), Commission, dated March

2, 2000 (‘‘Amendment No. 1’’).

5See Securities Exchange Act Release No. 41033

(February 9, 1999), 64 FR 8156 (February 18, 1999)≤

The pilot was initially approved through March eq,

2000. The termination of the pilot was subsequently

extended to September 30, 2000. See Securities

Exchange Act Release No. 42596 (March 30, 2000),

65 FR 18397 (April 7, 2000).

6Because ROS employs the Exchange’s

AutoQuote system and the Exchange’s AutoQuote

system relies on a data feed of the price of the

underlying security to determine the option’s price,

an inaccurate underlying price can lead to an

inaccurate ROS opening price.

7The concurrent approval of two Floor Officials

would be needed before a trade could be adjusted.

Telephone conversation between Timothy

Thompson, Director, Regulatory Affairs, CBOE, and

Terri Evans, Special Counsel, Division,

Commission, on May 17, 2000.

(ii) as to which the Exchange consents,

the commission will:

(A) By order approve such proposed

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.

Persons making written submissions

should file six copies thereof with the

Secretary. Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. 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 will also be

available for inspection and copying at

the principal office of the Amex. All

submissions should refer to the File No.

SR–Amex–00–04 and should be

submitted by June 16, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13259 Filed 5–25–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42799; File No. SR–CBOE–

99–20]

Self–Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 to Proposed Rule Change by the

Chicago Board Options Exchange, Inc.

Relating to the Exchange’s Rapid

Opening System

May 19, 2000.

I. Introduction

On May 21, 1999, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’)1 and Rule 19b–42

thereunder, a proposed rule change. In

its proposal, the CBOE seeks to amend

its Rapid Opening System (‘‘ROS’’) rule

to permit two Floor Officials to adjust

affected trades in cases where an

underlying stock has been opened at an

erroneous price and later corrected on

the underlying market. The proposed

rule change was published for comment

in the Federal Register on July 14,

1999.3 On March 22, 2000, the CBOE

filed Amendment No. 1 to the proposed

rule change.4 The Commission received

no comments on the proposal. This

order approves the proposal, as

amended. In addition, the Commission

is publishing this notice to solicit

comments on Amendment No. 1 to the

proposed rule change and is

simultaneously approving Amendment

No. 1 on an accelerated basis.

II. Description of the Proposal

In 1999, the Commission approved

ROS on a pilot basis.5 CBOE represents

that ROS enables the Exchange to open

classes of options within seconds of the

opening of the underlying security,

which in turn enables firms and

customers to enter orders in open

trading almost immediately after the

opening bell. In addition, CBOE believes

that in those classes where it has been

employed, ROS has prevented backlogs

of orders from developing during the

opening. However, according to the

Exchange, there have been a few

instances where ROS has opened an

option class at a price based upon an

erroneous opening price of the

underlying security disseminated by the

primary market which is later corrected

by the primary market only after ROS

had opened the option class.6

In those instances when ROS opened

on an erroneous print, the Exchange

represents that it had to expend a

substantial amount of time working

with the participants in the trades to get

their agreement to adjusts the trades and

to determine which customer orders

should have been filled at the opening.

According to the Exchange, market

makers in classes where ROS is

employed have suffered significant

deleterious financial consequences from

these openings on an erroneous print

because only those market maker trades

that occurred at a price that disfavored

a customer were adjusted. As a result,

the Exchange believes market makers

may become discouraged from

participating in ROS because, even

though the incidences where an

erroneous print occur are rare, the

financial consequences to a particular

market maker can be substantial.

The Exchange also notes that when

ROS opens based upon an incorrect

price of the underlying security, certain

customer orders can be adversely

affected. In particular, customer orders

that would have been executed had ROS

opened based on a correct price may not

be executed. Further, certain customerto-customer trades may be executed at

an erroneous price.

After these problems first occurred,

the Exchange represents that it tried to

educated trading crowds about ways to

avoid them. For example, the trading

crowds may wait to send their

AutoQuote values until after the initial

bid/ask quotes on the underlying are

disseminated to ensure that the initial

disseminated opening price for the

underlying security is in line with the

bid/ask quotes. Also, a system

enhancement was put in place that

provides as indication to crowds when

ROS is being opened at a price that

appears erroneous. The Exchange

believes, however, that there is no

guarantee that these methods can

prevent every occurrence of an opening

on ROS based on an erroneous

underlying price.

The Exchange believes, therefore, that

it is necessary to grant Floor Officials

the authority to adjust opening trades in

the event that the class is opened at an

erroneous price.7 The Exchange

represents that this authority is similar

to the authority Floor Officials currently

Federal Register / Vol. 65, No. 103 / Friday, May 26, 2000 / Notices 34239

8CBOE Rule 6.8(a)(ii) states in part; ‘‘A trade

execute on RAES at an erroneous quote should be

treated as a trade reported at an erroneous price and

adjusted to reflect the accurate market after

receiving a Floor Official’s approval.’’

9According to the Exchange, either Exchange

staff or the traders in the crowd where the

particular options class is traded will know that the

conditions have been met just as soon as the

underlying market disseminates a corrected

opening price, which usually occurs within a few

minutes of the erroneous print’s dissemination. The

traders who trade the options have access to the

underlying market’s quotes and will receive a

message that the opening print has been corrected.

See Amendment No. 1, supra note 4.

10According to the Exchange, it does not have an

automated system to handle the adjusting of these

trades so it could require a significant amount of

staff time to determine exactly which trades may

need to be adjusted. Where there have been only

a very few affected trades, the Exchange represents

that its staff may be able to provide Floor Officials

with the necessary information to adjust the trades

within a few minutes. In an opening where a large

number of trades are affected, the Exchange believes

that it may take a number of hours to sift through

the various trades and determine how each should

be adjusted. As a result, the Exchange proposes to

provide prompt notice that the situation has

occurred and that trades may be adjusted. In this

way, any trader or customer that may be affected

by the adjustment can take any appropriate action

to adjust his or her position. Because the opening

print and its correction will be known as soon as

any notice is disseminated, traders and customers

should be able to determine the likelihood of their

trade being adjusted and what the adjustment is

likely to be. See Amendment No. 1, supra note 4.

11 In addition, pursuant to Section 3(f) of the Act,

the Commission has considered the proposed rule’s

impact on efficiency, competition, and capital

formation. 15 U.S.C. 78c(f).

12 15 U.S.C. 78f(b)(5).

13Concurrent approval of both Floor Officials is

necessary before a trade can be adjusted. See supra

note 7.

14 15 U.S.C. 78s(b)(2).

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

have with respect to RAES trades.8 The

Exchange believes this change will

prevent market makers from becoming

discouraged from participating on ROS

and will save time spent by Exchange

staff negotiating with participants on

trades that occur on erroneous prints. At

the same time, the Exchange believes

the rule change will give Floor Officials

the authority to determine which trades

should be adjusted so that a fair and

equitable result is achieved for all

market participants, including those

customers that might not have been

filled on the opening but otherwise

would have been filled had the class

opened at the correct price.

Under the proposed rule change, the

Exchange will notify its members as

soon as practicable after the correction

of an erroneous print on the

underlying.9 In addition, the Exchange

will indicate that this may result in the

adjustment of opening trades that were

either executed on ROS or should have

been executed on ROS. Further, all

adjustments will be made the day of the

erroneous print correction.10

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether the amendment is

consistent with the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW, Washington, DC

20549–0609. 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 such filing will also be

available for inspection and copying at

the principal office of the CBOE. All

submissions should refer to File No.

SR–CBOE–99–20 and should be

submitted by June 16, 2000.

IV. Discussion

After careful review, the Commission

finds that the proposed rule change is

consistent with the requirements of the

Act.11 In particular, the Commission

finds the proposal is consistent with

Section 6(b)(5) 12 of the Act. Section

6(b)(5) requires, among other things,

that the rules of an exchange be

designed to promote just and equitable

principles of trade and to protect

investors and the public interest.

The Commission believes that the

proposed rule change promotes just and

equitable principles of trade. In

particular, the proposal allows two

Floor Officials to adjust trades when

ROS opens a class based on an

erroneous opening print disseminated

by the underlying market.13 In addition,

the proposal would not only affect

market makers, but also customers

whose orders should or should not have

been executed at opening. The

Commission believes that procedures to

correct erroneous trades in a timely

manner are in the interest of all parties.

The Commission also believes the

proposal includes adequate Exchange

oversight and review procedures by

requiring the concurrent approval of

two Floor Officials before a trade can be

adjusted. In addition, CBOE amended

the proposal with Amendment No. 1 to

include certain other procedural

protections that limit the Exchange’s

and Floor Officials’ discretion in

adjusting trades. In particular,

Amendment No. 1 requires the

Exchange to notify its members as soon

as practicable about the possibility of a

trade adjustment, limits the adjustment

of trades to those that were or should

have been executed at the opening, and

requires that the Exchange make the

adjustments on the day when the

correction of the erroneous print

occurred. The Commission believes

these requirements should help protect

investors who execute trades at the

opening that are later adjusted.

The Commission finds good cause for

approving Amendment No. 1 prior to

the thirtieth day after the date of

publication of notice thereof in the

Federal Register. The Commission

believes that Amendment No. 1 strikes

a reasonable balance between the need

to correct erroneous trades and the need

for adequate Exchange oversight over

the process. Further, the Commission

did not receive any comments on the

original proposal, which did not contain

the protections that were incorporated

into the proposal through Amendment

No. 1.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,14 that the

proposed rule change (SR–CBOE–99–

20), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Jonathan G. Katz,

Secretary.

[FR Doc. 00–13234 Filed 5–25–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42798; File No. SR–CBOE–

00–19]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Chicago Board Options Exchange,

Incorporated To Make Certain Changes

to Its Fee Schedule

May 18, 2000.

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 April 26,

2000, the Chicago Board Options

Exchange, Incorporated (‘‘CBOE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission