[Federal Register Volume 65, Number 120 (Wednesday, June 21, 2000)]
[Notices]
[Pages 38618-38620]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-15616]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42930; File No. SR-CBO-99-51]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Increase the 
Maximum Order Size Eligible for Automatic Execution

    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 September 1, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the CBOE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend its rules governing the operation of its 
Retail Automatic Execution System (``RAES'') to increase the maximum 
size of orders eligible for execution on RAES, and make conforming 
changes to CBOE's firm quote rule and Interpretation .03 thereunder. 
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 CBOE 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 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 principal purpose of the proposed rule change is to increase 
from fifty contracts to seventy-five contracts

[[Page 38619]]

the maximum size of orders for equity options and certain classes of 
index options that are eligible to be executed through RAES.\3\ 
Additionally, the proposed rule change makes certain complementary 
changes to the Exchange's firm quote rule and Interpretation .03 
thereunder.
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    \3\ RAES is the Exchange's automatic execution system for public 
customer market or marketable limit orders of less than a certain 
size.
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    Currently, the maximum size of RAES-eligible orders is fifty 
contracts for all classes of options traded on CBOE for which a greater 
maximum is not expressly provided in the rules.\4\ Options subject to 
the fifty contract maximum include all classes of equity options, all 
classes of sector index options and all other classes of index options 
except options on the S&P 500 Index, options on the Nasdaq 100 Index, 
options on the Dow Jones Industrial Average (``DJIA''), options on the 
High Yield Select Ten, and interest rate options.\5\ Increasing the 
RAES eligibility maximum to seventy-five contracts for these classes of 
options will not automatically permit orders up to this size to be 
entered into RAES. Instead, the actual maximum RAES eligibility size is 
established by the appropriate Floor Procedure Committee (``FPC'') of 
the Exchange, which may maintain the maximum for particular classes at 
levels below the seventy-five contract maximum that would be allowable 
under the proposed rule change.
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    \4\ See Securities Exchange Act Release No. 41821 (September 1, 
1999), 64 FR 50313 (September 16, 1999).
    \5\ The RAES eligibility maximum is currently 100 contracts for 
options on the S&P 500 Index, the Nasdaq 100 Index, the DJIA, the 
High Yield Select Ten, and interest rate options. See supra note 4.
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    The CBOE represents that increasing automatic execution levels will 
provide the benefits of automatic execution to a larger number of 
customer orders. The CBOE also represents that RAES affords prompt and 
efficient executions at the CBOE displayed price or, in most cases, at 
the National Best Bid or Offer (``NBBO'') if the NBBO is better than 
the CBOE's displayed bid or offer.
    The Exchange notes that there are many safeguards incorporated into 
Exchange rules to ensure the appropriate handling of RAES orders even 
as the maximum order size is increased. The Exchange's firm quote rule, 
Rule 8.51, ensures that non-broker dealer customer orders will be 
executed at the CBOE's displayed quote or better even if an order is 
rejected from RAES because a better quote is being disseminated by 
another market. Rule 8.51(a) states that the firm quote requirement for 
a particular class of options shall be no less than the RAES contract 
limit applicable to that class of options. This ensures that orders 
that are rejected from RAES will still be executed at the CBOE's 
displayed quote or better.
    In this filing, the CBOE proposes to amend Rule 8.51(a) to state 
that if the RAES contract limit is established at a level of higher 
than fifty contracts then the firm quote requirement will be for fifty 
contracts. The Exchange believes that because, for the most part, the 
RAES contract limit and the firm quote limit are of comparable levels 
on the CBOE, a firm representing a customer will not be disadvantaged 
if it determines to seek the quick and relatively assured execution 
available on RAES: even if the order is kicked out, if will be entitled 
to the firm quote guarantee in most instances.\6\
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    \6\ The Commission recently approved a proposal by the Exchange 
to allow an order entered into RAES to trade directly with an order 
on the Exchange's customer limit order book in those cases where the 
prevailing market bid or offer is equal to the best bid or offer on 
the Exchange's book. See Securities Exchange Act Release No. 41995 
(October 8, 1999), 64 FR 56547 (October 20, 1999).
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    In addition, the Commission has approved a rule filing permitting 
the implementation of Variable RAES.\7\ Variable RAES allows market 
makers to specify the maximum size of orders which they are willing to 
trade at any one time on RAES, subject to a minimum size that may be 
established by the appropriate FPC. Variable RAES was proposed to 
ensure that market makers are willing to continue to participate on 
RAES even as the maximum contract size is increased. The CBOE 
represents that the appropriate FPC will likely implement Variable RAES 
in any options class that has a contract limit of seventy-five 
contracts to ensure that there is adequate market-maker participation 
in that class.
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    \7\ See supra note 4.
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    There is also a rule that requires DPMs to participate in any 
automated execution system which may be open in appointed option 
classes (Rule 8.80(c)(5)) and a rule that states that market makers are 
expected to participate in and support Exchange-sponsored automated 
programs, including but not limited to RAES (Interpretation .07 to Rule 
8.7). The Exchange is in the process of assigning a large percentage of 
its option classes that were formerly traded in market-maker crowds to 
DPMs.\8\
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    \8\ The entire equity options floor has been assigned to DPMs. 
Telephone conversation between Timothy Thompson, Director--
Regulatory Affairs, CBOE, and Gordon Fuller, Special Counsel, 
Commission, on March 9, 2000.
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    The Exchange also has rules that allow for RAES to be suspended 
when a fast market has been declared in order to maintain a fair and 
orderly market.\9\ This rule provides the Exchange with the flexibility 
to intervene if it determines that there is inadequate market maker 
participation or capital requirements. In addition, CBOE Rule 8.16(b) 
requires a market maker who has logged onto RAES at any time during an 
expiration month to log onto RAES in that option class whenever he is 
present in the trading crowd until the next expiration. CBOE Rule 
8.16(c) states that if there is inadequate participation on RAES then 
Floor Officials of the appropriate Market Performance Committee may 
require market makers who are members of the trading crowd to log on to 
RAES absent reasonable justification or excuse for non-participation. 
Alternatively, the Floor Officials may allow market makers in other 
classes of options to log on to RAES in such classes.
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    \9\ See CBOE Rule 6.6(b)(vi).
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    With respect to financial responsibility issues, the Exchange notes 
that it has a minimum net capital requirement respecting DPMs which is 
currently set forth in Interpretation .02 to Rule 8.80. The Exchange 
has proposed to increase the DPM capital requirements in a rule filing 
pending before the Commission.\10\ In addition, the clearing firms for 
market makers and DPMs perform risk management functions to ensure that 
the market makers have sufficient financial resources to cover their 
positions.
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    \10\ See Securities Exchange Act Release No. 41325 (April 22, 
1999), 64 FR 2369 (May 3, 1999).
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    In addition to increasing the maximum size for RAES-eligible orders 
in certain classes of options, the Exchange is proposing to change 
Interpretation .03 to Rule 8.51, the Exchange's firm quote rule. 
Interpretation .03 states that ``Market-Maker orders and other broker-
dealer proprietary order that in each case are for less than the firm 
quote requirement applicable for that class of options and are 
represented in the crowd by a Floor Broker or DPM should not be 
reflected in the displayed market quote.'' With respect to all option 
classes other than broad-based index option classes, the Exchange is 
proposing to change this requirement such that the only orders exempted 
from being reflected in the market quote are market maker orders 
represented in the crowd by a Floor Broker or DPM for less than ten 
contracts. This change will ensure that any broker-dealer order 
represented in the crowd will be presented in CBOE's

[[Page 38620]]

quote and may thus become the basis for a quote at which an order may 
be executed. The Exchange will conduct further review to determine 
whether to include broad-based index option classes under the proposed 
change in the future.
    The Exchange believes that the increase should provide customers 
with quicker executions for a larger number of orders, by providing 
automatic rather than manual executions, thereby reducing the amount of 
orders subject to manual processing. In support of its proposal to 
increase the RAES eligibility maximum, CBOE represents that its system 
capacity is sufficient to accommodate the increased number of automatic 
executions anticipated to result from the implementation of this 
proposal.
2. Statutory Basis
    The proposed rule change will enhance the ability of the Exchange 
to provide instantaneous, automatic execution of public customers' 
orders at the best available prices, which furthers the objectives of 
Section 6(b)(5) \11\ of the Act to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market, and to protect investors and the public 
interest.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organizatin's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition.

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 self-regulatory organization consents, the Commission will:
    (A) by order approved such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    The Commission invites interested persons to submit written data, 
views, and arguments concerning the foregoing, including whether the 
proposed rule change is consistent with the Act. In addition, the 
Commission seeks comment concerning whether the proposed rule change 
fosters quote competition among options market professionals and 
enhances investors' interests in obtaining the best available price.
    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 
submission should refer to File No. SR-CBOE-99-51 and should be 
submitted by July 12, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-15616 Filed 6-20-00; 8:45 am]
BILLING CODE 8010-01-M