[Federal Register Volume 63, Number 120 (Tuesday, June 23, 1998)]
[Notices]
[Pages 34209-34210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16583]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40096; File No. SR-CBOE-98-13]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of Proposed Rule Change By the Chicago Board Options Exchange, 
Inc. Relating to the Automatic Execution of Small Retail Orders in 
Equity Options

June 16, 1998.

I. Introduction

    On April 6, 1998, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to 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 to amend Interpretation and 
Policy .02 under CBOE Rule 6.8 governing the operations of the 
Exchange's Retail Automatic Execution System (``RAES''). On May 13, 
1998, the CBOE filed with the Commission Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as amended, was 
published for comment in the Federal Register on May 21, 1998.\4\ The 
Commission received no comments regarding the proposal. This order 
approves the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Timothy Thompson, Director, Regulatory 
Affairs, Legal Department, CBOE, to Ken Rosen, Attorney, Division of 
Market Regulation, Commission, dated May 11, 1998 (``Amendment No. 
1'').
    \4\ Securities Exchange Act Release No. 39992 (May 14, 1998), 63 
FR 28019.
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II. Description of the Proposal

    Presently, under CBOE Rule 6.8(a)(ii), the execution price 
automatically attached to an equity option order executed in RAES is 
the prevailing market quote on the CBOE at the time the order is 
entered into the system. If at that same time another market is 
displaying a better quote for the option, under CBOE Rules the order is 
not automatically executed, but instead, pursuant to Interpretation and 
Policy .02 under CBOE Rule 6.8, is rerouted for non-automated handling. 
In most cases, especially where the market away from the CBOE is better 
by only one ``tick'' (i.e., by one minimum quote interval), the order 
is usually manually executed on the CBOE at the better price.
    The CBOE now proposes to amend Interpretation and Policy .02 to 
automate the process of filling equity option orders through RAES at 
any better price being quoted in another market, so long as the price 
is better by no more than one tick (``RAES Auto-Step-Up''). If the 
market away from the CBOE is better than the CBOE's quoted market by 
more than one tick, the existing procedure will continue to apply 
whereby the order is rerouted out of RAES to the Designated Primary 
Market Maker or Order Book Official for non-automated handling.
    While the Exchange expects that eventually the Floor Procedure 
Committees will determine to apply the RAES Auto-Step-Up to all or 
nearly all option classes traded on the floor, the proposed rule change 
would permit the program to be initiated on a class by class or trading 
station by trading station basis.\5\ To provide for the orderly 
introduction of this change to the Exchange's RAES procedures and to 
measure its effect before expanding it to equity options floor-wide, 
the Exchange intends to introduce the changed RAES procedure to 
selected classes of equity

[[Page 34210]]

options during an initial evaluation period, and then over time to 
expand the changed procedure to cover a larger number of equity options 
unless, upon evaluation, such expansion appears not to be warranted. 
Members will be given advance notice of each class of options to which 
these revised procedures apply.
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    \5\ See Amendment No. 1.
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    In addition, the proposed rule change authorizes the Chairman of 
the appropriate Floor Procedure Committee or his or her designee to 
disable RAES Auto-Step-Up for specified classes or series of options or 
in respect of specified markets when ``quotes in such options or 
markets are deemed not to be reliable.'' This authority would be 
expected to be exercised in circumstances such as communication or 
system problems, fast markets, and similar situations that could make 
quotes unreliable. For instance, the Exchange is infrequently faced 
with delays in the dissemination of quotes because of queues on the 
Options Price Reporting Authority (``OPRA''). When the Exchange is made 
aware of OPRA delays, it knows that there is a delay in the 
dissemination of quotes from the other exchanges. As a result, those 
quotes likely would be stale. Under that circumstance, the Chairmen of 
the Floor Procedure Committees might decide to exercise their exemptive 
authority under the proposal. The Exchange has represented to the 
Commission that it expects such authority to be exercised 
infrequently.\6\
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    \6\ See Amendment No. 1.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act. In particular, 
the Commission believes the proposal is consistent with Section 3(f) 
\7\ and Section 6(b)(5) \8\ 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.
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    \7\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    By automating the execution of eligible retail orders for equity 
options through the RAES Auto-Step-Up, the amended Interpretation and 
Policy .02 should help to insure that investors receive prompt, 
automatic execution of RAES orders at the best available prices, even 
if those prices are being quoted in a market other than the Exchange, 
when the better prices in other markets do not improve on the CBOE's 
market by more than one tick. This proposal should minimize the delay 
inherent in manually handling orders in this circumstance, and thereby 
reduce the risk to investors that, as a result of an adverse move in 
the market while their orders are being manually handled, they may 
receive an inferior execution.
    Moreover, the amendment to Interpretation and Policy .02 is 
consistent with Section 3(f) of the Act. Among other things, that 
Section requires the Commission to consider whether proposed rule 
changes will promote competition. The RAES Auto-Step-Up feature, when 
activated, should enhance competition by requiring executions on the 
CBOE at better prices found on other exchanges.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. This will permit 
customers to receive the benefits of automatic price improvement under 
the proposed rule change more quickly. In addition, the Commission 
recognizes that orders are already eligible for manual price 
improvement when routed to the floor. This proposal merely automates 
that price improvement for those options to which the Auto-Step-Up 
feature applies. Moreover, the Commission notes that the full 21 day 
comment period has expired, and no adverse comments were received.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-98-13), as amended, is 
hereby approved on an accelerated basis.

    \9\ 15 U.S.C. 78s(b)(2).
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    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. 98-16583 Filed 6-22-98; 8:45 am]
BILLING CODE 8010-01-M