Federal Register / Vol. 63, No. 151 /Thursday, August 6, 1998 / Notices 42085

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

2 In Amendment No. 1, the Exchange changed the

proposed rule language, clarifying when the new

provision may be exercised. The Exchange also

further explained how the altered system operates.

See Letter from Timothy H. Thompson, Director,

Regulatory Affairs, Legal Department, CBOE, to

Richard Strasser, Assistant Director, Division of

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

June 23, 1998 (‘‘Amendment No. 1’’).

3 In Amendment No. 2, the Exchange further

detailed the operation of its computer system and

altered the proposed rule language to clarify the

new rule’s interaction with CBOE Rule 6.45. See

Letter from Timothy H. Thompson, Director,

Regulatory Affairs, Legal Department, CBOE, to

Richard Strasser, Assistant Director, Division,

Commission, dated July 10, 1998 (‘‘Amendment No.

2’’).

4 In Amendment No. 3, the Exchange further

explains the new rule’s interaction with CBOE Rule

6.45. See Letter from Timothy H. Thompson,

Director, Regulatory Affairs, Legal Department,

CBOE, to Richard Strasser, Assistant Director,

Division, Commission, dated July 20, 1998

(‘‘Amendment No. 3’’).

5There are generally six ways an order may be

routed to the live ammo screen. First, if a customer

submits a cancel/replace order to the market for an

order already held by the book that order will go

to the live ammo screen. Second, if a customer

submits a cancel/replace order to a limit price that

betters the same-side market quote for an order held

by the book, that order will go to the live ammo

screen. Third, market orders received through the

Exchange’s order shoe and that are manually

booked will go to the live ammo screen. Fourth,

limit orders that better the same-side market quote,

that are received through the order shoe, and that

are manually booked will go to the live ammo

screen. Fifth, limit orders that better the same-side

market quote and that are routed directly to the

Electronic Book when the routing parameters have

been set at ‘‘0’’ will go to the live ammo screen.

Sixth, marketable limit orders that are electronically

booked from a floor broker’s PAR workstation will

go to the live ammo screen. See Amendment No.

2.

6Amendment No. 1 clarified that, in addition to

accepting one order or a whole page or orders, the

system also can accept any number of orders from

the same page at one time. See Amendment No. 1.

7Most option classes have an eligible order size

for RAES of ten contracts. Some have an eligible

order size of twenty contracts.

8See Amendment No. 1.

9SeeAmendment No. 2.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40283; File No. SR–CBOE–

98–27]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. and Amendments Nos. 1, 2 and 3

Relating to Enhancements to the

Exchange’s Order Execution System

July 30, 1998.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

June 16, 1998, the Chicago Board

Options Exchange, Inc. (‘‘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. On June 23,

1998, the CBOE submitted to the

Commission Amendment No. 1 to the

proposed rule change.2 On July 15,

1998, the CBOE submitted to the

Commission Amendment No. 2 to the

proposed rule change.3 On July 21,

1998, the CBOE submitted to the

Commission Amendment No. 3 to the

proposed rule change.4 The Commission

is publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE is amending its rule

governing the execution of orders by an

Order Book Official (‘‘OBO’’) or the

Designated Primary Market-Maker

(‘‘DPM’’) book staff to provide for the

electronic execution of certain orders on

the ‘‘live ammo’’ screen. This change is

being accommodated by an

enhancement to the Exchange’s order

execution systems.

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

The CBOE is amending one of its

rules to allow an OBO or a DPM to

designate orders to be electronically

executed against market-makers

standing in the crowd. Currently, an

OBO or a DPM, acting in his or her

capacity as an OBO, represents in the

trading crowd the orders that have been

placed on the customer limit order

book. These orders are represented

individually when they become

marketable and are traded with the

market-makers standing in the crowd.

The OBO (or DPM) is able to determine

which orders are marketable by

reviewing his or her ‘‘live ammo’’

screen, which is an electronic book

screen that displays orders that are

market orders or limit orders that

improve the market.5 However, when

the live ammo screen experiences a

large influx of orders it becomes

difficult for the OBO (or DPM) to

represent and execute these orders

individually in a timely manner and a

sizable backlog can develop. This is

particularly true during opening

rotations when a large number of orders

can build up on the ‘‘live ammo’’

screen.

To speed the process of the OBO or

DPM executing live ammo orders, the

CBOE is proposing to change its order

execution systems to allow the OBO or

DPM to select orders to be executed

electronically. The OBO or DPM may

select for electronic execution one order

individually or he or she may, after

reviewing the orders on the screen,

select all orders displayed on a live

ammo page (currently a page may

contain up to thirteen orders).6 Orders

selected for electronic execution against

a participating market-maker must meet

the same criteria as those for Retail

Automatic Execution System (‘‘RAES’’)

eligible orders. To be eligible to be

executed on RAES, the order must be a

marketable limit order that is for the

number of contracts established by the

Equity Floor Procedure Committee for

that options class (or fewer), pursuant to

Rule 6.8(e).7 Orders that are not RAES

eligible when the page is selected will

remain on the live ammo screen. Any

market-maker who is signed onto RAES

at the time the OBO or DPM selects the

order or orders for electronic execution

will be eligible to be electronically

assigned as the contra-party on the

trade.

In Amendment No. 1, the CBOE

altered the proposed rule’s language,

adding conditions for when the OBO or

DPM may route a live ammo order for

electronic execution.8 The OBO or DPM

may do so when he or she believes there

are unusual market conditions or when

there is a large influx of orders to the

live ammo screen. Moreover, the OBO

or DPM must consult with the crowd

before routing a live ammo order or

orders for electronic execution.

In Amendment No. 2, the CBOE

added language to the proposed rule

change, explaining that the rule would

operate notwithstanding the priority

provisions of paragraphs (a) and (b) of

CBOE Rule 6.45.9 CBOE Rule 6.45 gives

priority to some bids and offers, because

they were made earlier in time, over

other bids and offers. The Exchange
42086 Federal Register / Vol. 63, No. 151 /Thursday, August 6, 1998 / Notices

10 In Amendment No. 3, the Exchange clarified

that the time priority provisions of CBOE Rule 6.45

will continue to govern the sequence in which

RAES-eligible orders are executed using the new

electronic execution feature. See Amendment No. 3. 11See Amendment No. 2. 12 17 CFR 200.30–3(a)(12).

explains that it is possible that a RAESeligible live ammo order may be

executed prior to a non-RAES eligible

order received earlier.10 The Exchange

believes these occurrences will be

infrequent for two reasons. First, the

non-RAES-eligible order must be for the

same series as the RAES-eligible order

that is traded for there to be an

interruption of the normal priority

principles. Second, for the RAESeligible order to trade ahead of the nonRAES-eligible order, the limit price of

the non-RAES-eligible order must be at

the CBOE’s quoted market because that

is the price at which the RAES-eligible

order will be executed. When the limit

for the larger non-RAES-eligible order is

at the market, the CBOE book staff will

act to execute that order promptly.

Therefore, it is only in those cases

where the CBOE book staff has not had

the opportunity to fill those executable

non-RAES-eligible live ammo orders

before sending orders for electronic

execution that the RAES-eligible order

will be filled before the non-RAESeligible order that has time priority.

Based on its experience with how book

staffs generally handle their orders, the

Exchange believes that, once the system

is in place, the book staff will usually

attempt to fill the larger orders that were

first in time before they send live ammo

orders to be electronically executed.

Alternatively, one member of the book

staff may seek to execute the larger nonRAES eligible orders at the same time

another member sends the RAESeligible live ammo orders to be

electronically executed.

Regardless of the possibility that

RAES-eligible live ammo orders may

trade ahead of non-RAES-eligible

orders, the Exchange believes that the

current proposal is in the best interest

of the CBOE marketplace and public

customers. This is because the system

will only be employed when the OBO

or DPM believes there to be unusual

market conditions or when there is a

large influx of orders to the live ammo

screen. In these situations the

employment of this system will allow

the book staff and the crowd to attend

to the execution of other business and

will improve the turnaround time of

many customer orders. Any non-RAESeligible live ammo orders that were not

executed before the live ammo orders

were sent to be electronically executed

could be executed at this time assuming

they are marketable.

The Exchange also notes that the

system will retain book priority. This

means, for example, if the book staff

selects a page of live ammo orders to be

electronically executed at the time the

CBOE’s best bid or offer on the limit

order book equals the prevailing market

quote, no live ammo orders will be

executed but those orders will remain

on the live ammo screen. Only after

those booked orders have been executed

(or the market changes) will the book

staff be able to effectively send the live

ammo orders to be electronically

executed.11

In general, the proposed system

change will significantly improve the

turnaround time of customer orders and

will allow book staff and market-makers

in the crowd to attend to the transaction

of other orders during busy times. The

Exchange also believes this system

change will alleviate the need to declare

fast markets in certain situations

because it will allow for the faster

execution of orders and will prevent

orders in the live ammo screen from

becoming backlogged.

Because the system enhancements to

the Exchange’s order execution systems

will allow for the OBO or DPM to avoid

a backlog of orders on the live ammo

screen and thus to allow market-makers

and the book staff to attend to other

business, the Exchange believes this

rule change is consistent with and

furthers the objectives of Section 6(b)(5)

of the Act in that it would foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, and processing information

with respect to, and facilitating

transactions in securities, and would

remove impediments to and perfect the

mechanism of a free and open market in

a manner consistent with the protection

of investors and the public interest.

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.

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, N.W.,

Washington, D.C. 20549. 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–98–27 and should be

submitted by August 27, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20967 Filed 8–5–98; 8:45 am]

BILLING CODE 8010–01–M