69082 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

13 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. 42930

(June 13, 2000), 65 FR 38618 (June 21, 2000).

4See letter from Timothy Thompson, Assistant

General Counsel, Legal Department, CBOE, to

Gordon Fuller, Special Counsel, Division of Market

Regulation, Commission, dated September 29, 2000.

(‘‘Amendment No. 1’’).

5Options 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.

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 Securities

Exchange Act Release No. 41821 (September 1,

19999), 64 FR 50313 (September 16, 1999).

6The proposed increase to seventy-five contracts

will not apply to those classes of index options

cited in footnote 5 above.

7See CBOE Rule 8.51.

8See CBOE Rule 6.8(e).

7See CBOE Rule 6.8, Interpretation .02.

10See supra note 5 (citing to the order

implementing Variable RAES on the CBOE).

11See CBOE Rule 8.85(a)(9).

12All equity options have now been assigned to

DPMs. Telephone conversation between Timothy

Thompson, Director-Regulatory Affairs, CBOE, and

Gordon Fuller, Special Counsel, Commission, on

March 9, 2000.

13See CBOE Rule 6.6(b)(vi).

including Amendment No. 3, in

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29180 Filed 11–14–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43517; File No. SR–CBOE–

99–51]

Self-Regulatory Organizations; Order

Granting Approval of Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval of

Amendment No. 1 by the Chicago

Board Options Exchange, Inc. Relating

to the Maximum Size of Option Orders

Eligible for Automatic Execution

November 3, 2000.

I. Introduction

On September 1, 1999, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) pursuant to section

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

of 1934 (‘‘Act’’)1 and Rule 19b-4

thereunder,2 a proposed rule change

amending its rules regarding the

automatic execution of options orders to

increase the maximum number of

contracts eligible to be executed on the

Exchange’s Retail Automatic Execution

System (‘‘RAES’’) from fifty contracts to

seventy-five contracts. Notice of the

proposal was published in the Federal

Register on June 21, 2000.3 The

Commission received no comments on

the proposal. On October 3, 2000, the

Exchange submitted Amendment No. 1

to the proposal.4 This order approves

the proposal and grants accelerated

approval of Amendment No. 1.

II. Description of the Proposal

RAES automatically executes public

customer market and marketable limit

orders that fall within designated order

size parameters. Generally, the

maximum size of public customer

market and marketable limit orders

eligible for automatic execution through

the RAES is fifty contracts.5 The

Exchange proposes to increase from fifty

contracts to seventy-five contracts the

maximum size of orders for equity

options and certain classes of index

options that are eligible to be executed

through RAES.6 In addition, the

Exchange seeks to make certain

complementary changes to the

Exchange’s firm quote rule and

Interpretation .03 thereunder.7

The Exchange notes that increasing

the maximum size of orders eligible for

execution through RAES to seventy-five

contracts will not permit orders up to

this size to be entered into RAES unless,

for a particular options class, the

appropriate Floor Procedure Committee

(‘‘FPC’’) of the Exchange has

determined, in its discretion, not to

restrict the size of eligible orders in that

options class.8 In addition, the

Exchange represents that increasing

automatic execution levels should

provide the benefits of automatic

execution to a larger number of

customer orders. Further, the Exchange

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.9

The Exchange notes that its rules

contain several safeguards to ensure the

proper handling of RAES orders, even as

the maximum order size is increased.

First, the Commission has approved the

implementation of variable RAES on the

CBOE.10 Variable RAES allows market

makers to specify the maximum size of

orders that they are willing to trade at

any one time on RAES; however, this

determination is 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 participating on

RAES even as the maximum contract

size is increased. The Exchange

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.

Second, the Exchange requires

Designated Primary Market-Makers

(‘‘DPMs’’) to participate in any

automated execution system which may

be open in appointed option classes.11

Further, Interpretation .07 to CBOE Rule

8.7 states that market makers are

expected to participate in and support

Exchange-sponsored automated

programs, including but not limited to,

RAES. 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.12

Third, the Exchange’s rules allow for

RAES to be suspended when a fast

market has been declared in order to

maintain a fair and orderly market.13

CBOE Rule 6.6(b)(vi) 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. Further,

CBOE Rule 8.16(c) provides that 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

nonparticipation if there is inadequate

participation on RAES. Alternatively,

the Floor Officials may allow market

makers in other classes of options to log

on to RAES in such classes.

Finally, the Exchange notes that its

rules provide a minimum net capital

requirement regarding DPMs, which is

currently set forth in CBOE Rule 8.86.

Further, 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 throughout the day.

In addition to increasing the

maximum size for RAES-eligible orders

in certain classes of options, the

Exchange proposes to amend its firm

quote rule, CBOE Rule 8.51. Currently,

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69083

14For the remainder of the order in excess of fifty

contracts, the trading crowd will attempt to fill the

order at the same price as the first fifty contracts.

Telephone conversation between Timothy

Thompson, Assistant General Counsel, Legal

Department, CBOE, and Gordon Fuller, Special

Counsel, Division of Market Regulation,

Commission, on October 30, 2000. An order entered

into RAES can 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). 15 In Amendment No. 1, the Exchange made

technical changes to the proposed rule text to

conform with recent amendments to Interpretation

.03. See Securities Exchange Act Release No. 42558

(March 22, 2000), 65 FR 16676 (March 29, 2000).

16See Amendment No. 1, supra note 4.

17 Id.

18 Id.

19See CBOE Rule 8.51(a)(2).

20See CBOE Rule 6.8(a)(ii). Of course, pursuant

to the terms of Interpretation .02 to Exchange Rule

6.8, the RAES order may instead be filled at the

NBBO if the NBBO is no more than the designated

number of ticks better than the CBOE best bid or

offer, or the order may be rejected for manual

handling if the NBBO is more than the designated

number of ticks better than the CBOE best bid or

offer. The appropriate FPC has determined that the

designated number of ticks shall be one tick.

21The Commission has considered the proposed

rule’s impact on efficiency, competition and capital

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

22 15 U.S.C. 78f(b)(5).

23The Commission notes that it is concurrently

approving similar proposals filed by the American

Stock Exchange, LLP (‘‘Amex’’), the Pacific Stock

Exchange, Inc. (‘‘PCX’’), and the Philadelphia Stock

Exchange, Inc. (‘‘Phlx’’). See Securities Exchange

Act Release Nos. 43516 (November 3, 2000) (SR–

Amex–99–45); 43518 (November 3, 2000) (SR–PCX–

00–32); and 43515 (November 3, 2000) (SR–Phlx–

99–32).

the firm quote requirement may not be

less than the RAES contract limit

applicable to that class of options. The

Exchange proposes to amend CBOE

Rule 8.51(a) to provide that if the RAES

contract limit is established at a level of

higher than fifty contracts, then the firm

quote requirement will remain at 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

always receive firm quote protection to

the extent of fifty contracts.14

The Exchange also proposes to change

Interpretation .03 to CBOE Rule 8.51.

Interpretation .03 to CBOE Rule 8.51

currently provides that orders for

accounts exempted from the firm quote

requirement should not be reflected in

the displayed quote when those orders

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.15 With

respect to broad-based index option

classes, the Exchange proposes to

change this requirement such that

orders represented in the crowd by a

Floor Broker or DPM for less than the

firm quote requirement need not be

reflected in the displayed market

quote.16 In addition, with respect to

classes other than broad-based index

options, orders for less than ten

contracts need not be reflected in the

displayed quote.17 Thus, the DPM or

another member of the trading crowd

may determine to reflect the price of a

market-maker or proprietary brokerdealer order in the displayed market

quote even if that order is for less than

the firm quote requirement for broadbased index options, or if the order is

for less than ten contracts for all other

options classes.18 Once the price of such

an order is reflected in the displayed

market quote, the trading crowd would

be subject to the firm quote obligations

of CBOE 8.52(a)(2) even though the firm

quote limit may be greater than the size

of the displayed market-maker or

proprietary broker-dealer order. By

reflecting the price of that order in the

quote, the trading crowd will be

obligated to sell (buy) at least the

established firm quote limit for that

option class at the approved offer (bid)

which the crowd determined to display

when a buy (sell) order reaches the

trading station where the particular

option class is located for trading (as

long as the improved bid or offer

remains displayed), even though the

firm quote limit will be greater than the

size of the market-maker order or other

proprietary broker-dealer order.19

Furthermore, any RAES order that is

entered while that improved price is

displayed will be executed at that

improved price even if that order is for

more contracts than was the size of the

displayed market-maker or proprietary

broker-dealer order.20 The CBOE

represents that this change should

ensure that any broker-dealer order

represented in the crowd will be

represented in the Exchange’s quote and

thus may become the basis for a quote

at which an order may be executed. The

Exchange represents that it will conduct

further review to determine whether to

include broad-based index option

classes under the proposed change in

the future.

The Exchange represents that its

systems capacity is sufficient to

accommodate the increased number of

automatic executions anticipated to

result from the implementation of this

proposal. The Exchange believes that

automatic execution of orders for up to

seventy-five contracts will 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.

III. Discussion

After careful review, the Commission

finds that the proposed rule change is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange and, in particular,

the requirements of section 6 of the

Act.21 Among other provisions, section

6(b)(5) of the Act requires that the rules

of an exchange be designed to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating securities

transactions; remove impediments to

and perfect the mechanism of a free and

open market and a national securities

system; and protect investors and the

public interest.22

While increasing the maximum order

size limit from fifty contracts to seventyfive contracts for RAES eligibility by

itself does not raise concerns under the

Act,23 the Commission believes that this

increase raises collateral issues that the

CBOE will need to monitor and address.

Increasing the maximum order size for

particular option classes will make a

larger number of option orders eligible

for the Exchange’s automatic execution

system. These orders may benefit from

greater speed of execution, but at the

same time create greater risks for market

maker participants. Market makers

signed onto the RAES system will be

exposed to the financial risks associated

with larger-sized orders being routed

through the system for automatic

execution at the displayed price. When

the market for the underlying security

changes rapidly, it may take a few

moments for the related option’s price

to reflect that change. In the interim,

customers may submit orders that try to

capture the price differential between

the underlying security and the option.

The larger the orders accepted through

RAES, the greater the risk market

makers must be willing to accept. The

Commission does not believe that,

because the Exchange’s appropriate FPC

determines to approve orders as large as

seventy-five contracts as eligible for

RAES, the FPC or any other CBOE

committee or officials should disengage

RAES more frequently by, for example,

declaring a ‘‘fast’’ market. Disengaging

RAES can negatively affect investors by

making it slower and less efficient to

execute their option orders. It is the

Commission’s view that the Exchange,

when increasing the maximum size of

orders that can be sent through RAES,

should not disadvantage all customers—

69084 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

24 15 U.S.C. 78s(b)(2).

25See Amendment No. 1, supra note 4.

26 15 U.S.C. 78f(b)(5).

27 15 U.S.C. 78s(b)(2).

28 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Exhibit 3 to Amendment No. 8 contains a

summary of how the NASD intends that the

SuperMontage will operate. The summary

incorporates and reconciles the original rule

proposal and the subsequent proposed

amendments, including Amendment No. 8. Exhibit

3 is available for public inspection in the

Commission’s Public Reference Room.

4See Securities Exchange Act Release No. 42166

(Nov. 22, 1999), 64 FR 69125.

5See letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division of Market Regulation (‘‘Division’’),

Commission (March 15, 2000) (‘‘Amendment No.

3’’). In Amendment No. 3, the NASD responded to

comment letters and submitted substantive,

clarifying, and technical amendments to the

proposal.

6See Securities Exchange Act Release No. 42573

(March 23, 2000), 65 FR 16981 (‘‘Amendment No.

4’’).

7See Letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division, Commission (May 16, 2000)

(‘‘Amendment No. 5’’).

8See letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division, Commission (July 6, 2000) (‘‘Amendment

No. 6’’).

9See letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division, Commission (August 7, 2000)

(‘‘Amendment No. 7’’).

10See Securities Exchange Act Release No. 43133

(August 10, 2000), 65 FR 149842 (‘‘August 15, 2000

Notice’’).

11The amended rule language contained in this

notice reflects the Commission’s approval of SR–

NASD–99–11, regarding the estabishment of the

Nasdaq National Market System (‘‘NNMS’’). See

Securities Exchange Act Release No. 42344 (January

14, 2000), 65 FR 3987 (January 25, 2000) (Order for

File No. SR–NASD–99–11 functionally integrating

the Small Order Execution System (‘‘SOES’’) and

SelectNet system to become the foundation of the

NNMS). In addition, the amended rule language

replaces, in the entirety, the rule language

contained in the original filing, as well as

Amendment Nos. 1 through 7.

the vast majority of which enter orders

for less than seventy-five contracts—by

making the RAES system less reliable.

Finally, the Commission finds good

cause for approving Amendment No. 1

prior to the 30th day after notice of the

Amendment is published in the Federal

Register pursuant to section 19(b)(2) of

the Act.24 Amendment No. 1 makes

technical changes to the proposed rule

text to reflect changes to Interpretation

.03 to Rule 8.51 made in the filing of the

proposed change. In addition,

Amendment No. 1 clarifies that the

DPM or another member of the trading

crowd may determine to reflect the

price of a market maker or other

proprietary broker-dealer order in the

displayed quote, even if that order is for

less than the firm quote requirement (in

the case of broad-based index options)

or if the order is for less than ten

contracts (in the case of all other option

contracts.) 25 The Commission believes

that the proposal may increase price

transparency at the Exchange by

expanding the kinds of orders eligible to

be reflected in the Exchange’s displayed

quote. The Commission finds that

accelerated approval of Amendment No.

1 is appropriate in order to permit the

opportunity for increased transparency

for market-maker orders or other

proprietary broker-dealer orders.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether it 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–99–51 and should be

submitted by December 6, 2000.

Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder applicable to a national

securities exchange, and, in particular,

with section 6(b)(5). 26

It Is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,27 that the

proposed rule change (SR–CBOE–51) is

approved, and Amendment No. 1 is

approved on an accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 28

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29187 Filed 11–14–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43514; No. SR–NASD–99–

53]

Self-Regulatory Organizations; Notice

of Filing of Amendment No. 8 to

Proposed Rule Change by the National

Association of Securities Dealers, Inc.

Relating to the Establishment of

Nasdaq Order Display Facility and to

Modifications of the Nasdaq Trading

Platform

November 3, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19(b)(4) thereunder,2

notice is hereby given that on October

23, 2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’),

through its subsidiary, The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’), filed

with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

Amendment No. 8 to the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the NASD.3 The proposed

rule change and Amendment Nos. 1 and

2 were published for comment in the

Federal Register on December 6, 1999.4

On March 16, 2000, the NASD filed

Amendment No. 3 to the proposal.5 On

March 30, 2000, Amendment No. 4 was

published for comment in the Federal

Register.6 On May 16, 2000, the NASD

filed Amendment No. 5 to the

proposal.7 On July 6, 2000, the NASD

filed Amendment No. 6 to the

proposal.8 On August 7, 2000, the

NASD filed Amendment No. 7 to the

proposal.9 On August 15, 2000

Amendment Nos. 5, 6, and 7 were

published for comment in the Federal

Register.10 The Commission is

publishing this notice to solicit

comments on Amendment No. 8 from

interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD, through its subsidiary

Nasdaq, is filing substantive and

technical amendments to File No. SR–

NASD–99–53, which proposes to

establish the Nasdaq Order Display

Facility (‘‘NODF’’) and make changes to

the Nasdaq National Market System

(‘‘NNMS’’).11 Because the NASD is

proposing alternative approaches to

preferenced orders, there are two

versions of the proposed rule text

reflecting Alternative A and Alternative

B. Except for the provisions relating to