[Federal Register Volume 65, Number 238 (Monday, December 11, 2000)]
[Notices]
[Pages 77404-77405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31387]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43638; File No. SR-CBOE-00-57]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Prohibition Against Electronically Generated and Communicated 
Orders

November 29, 2000.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ (``Act'') and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 13, 2000, 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, 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 Exchange proposes to amend CBOE Rule 6.8A, which governs the 
entry of electronically generated and communicated orders. Pursuant to 
the proposed amendment, an order would be deemed electronically 
generated and communicated for purposes of the Rule even if a practice 
requiring minimal human intervention has been added to the process of 
electronically generating and communicating the order.
    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
    On September 12, 2000, the Commission approved a proposed rule 
change filed by the Exchange that prohibits the entry of certain 
options orders that are created and communicated electronically, 
without manual input, into the CBOE's Order Routing System 
(``ORS'').\3\ Specifically, the new Rule (CBOE Rule 6.8A) provides that 
members may not enter nor permit the entry of, orders into ORS if those 
orders are created and communicated electronically without manual input 
and if such orders are eligible for execution on Retail Automatic 
Execution System (``RAES'') at the time they are sent.\4\ To be 
permitted under the Rule, order entry by public customers or associated 
persons of members must involve manual input, such as entering the 
terms of an order into an order-entry screen or manually selecting a 
displayed order against which an off-setting order should be sent.
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    \3\ See Securities Exchange Act Release No. 43285 (September 12, 
2000), 65 FR 56972 (September 20, 2000) (SR-CBOE-00-01). The 
Exchange's rule is similar to a rule of the International Securities 
Exchange (``ISE'') that the Commission approved earlier. When the 
Commission approved ISE's application for Exchange registration, it 
also approved several ISE rules, including ISE Rule 717(f) regarding 
the entry of computer-generated orders. See Securities Exchange Act 
Release No. 42455 (February 24, 2000), 65 FR 11401 (March 2, 2000).
    \4\ CBOE Rule 6.8A clarifies that an order is eligible for 
execution on RAES if: (1) Its size is equal to or less than the 
maximum RAES order size for the particular option series; (2) the 
order is marketable or is tradable pursuant to the RAES auto step-up 
feature at the time it is sent; and (3) the order has either no 
contingency or has a contingency that is accepted for execution by 
RAES.
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    In its Order approving CBOE Rule 6.8A,\5\ the Commission noted that 
allowing the entry of electronically generated and communicated orders 
could undercut CBOE's business model.\6\ As CBOE Rule 6.8A is currently 
drafted, however, it is the Exchange's view that the Rule is capable of 
being easily undermined. Professional traders that have developed or 
purchased software to electronically generate and communicate orders 
can easily install a simple manual step into the process in order to 
avoid a violation of the Rule. In fact, the Exchange has learned that 
professional traders have had persons enter a keystroke to 
electronically generate and communicate orders to an exchange's order 
routing system in order to circumvent the prohibition against such 
orders that have been adopted by other exchanges.
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    \5\ See note 3, supra.
    \6\ Specifically, the Commission noted: `` * * * the Commission 
recognizes that the CBOE's business model depends on market makers 
for competition and liquidity. Allowing electronic order entry into 
ORS could give automated customers a significant advantage over 
market makers. This could undercut CBOE's business model.'' Id. at 
56973.
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    The one comment letter submitted to the Commission on the 
Exchange's proposed rule change adopting the CBOE Rule 6.8A made this 
same point.\7\ The commenter noted, ``[t]he CBOE should be free to 
interpret its prohibition against electronically generated and 
submitted orders to include orders with nominal or minimal human 
intervention. Otherwise, CBOE's proposal could be completely 
undermined.''\8\
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    \7\ Letter from Joel Greenberg, Managing Director, Susquehanna 
Investment Group, to Jonathan G. Katz, Secretary, Commission, dated 
August 29, 2000.
    \8\ Id. at p. 3.
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    The Exchange believes that its proposed new interpretation to Rule 
6.8A is an appropriate response to the potential harm that could result 
to its business model from those persons who can easily avoid 
violations of the Rule as it currently stands. The Exchange does not 
believe it is enough to simply prohibit orders that are sent by the 
entry of a single keystroke because those

[[Page 77405]]

professional traders who determine to send electronically generated 
orders would, thus, be able to avoid violations by inputting two 
keystrokes or by inputting one touch of a computer screen. 
Consequently, the proposed interpretation provides some leeway for the 
Exchange to determine what constitutes minimal human intervention.
    The Exchange will be willing to provide interpretive guidance to 
its members in order to help them determine what type of action will be 
deemed to be minimal human intervention and what type of activity will 
not be considered minimal human intervention. The Exchange will also be 
willing to provide advice to its members about whether a particular 
surveillance mechanism to detect violations of this Rule by its 
customers is adequate.
2. Statutory Basis
    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of the Act \9\ in that it is designed to 
remove impediments to a free and open market and protecting investors 
and the public interest.
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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the Act.

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 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 Section. Copies of such filing will also 
be available for inspection and copying at the principal office of 
CBOE. All submissions should refer to the File Number SR-CBOE-00-57 and 
should be submitted by January 2, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31387 Filed 12-8-00; 8:45 am]
BILLING CODE 8010-01-M