[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26058-26059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12002]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35695; File No. SR-CBOE-95-06]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated, Relating to 
the CBOE Retail Automatic Execution System

May 9, 1995.

I. Introduction

    On January 18, 1995, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed a proposed rule change 
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\ to 
modify the operation of the CBOE's Retail Automatic Execution System 
(``RAES''). The proposed rule change would grant senior staff in the 
Exchange's Control Room the authority to turn off RAES in the event of 
a system malfunction that affects the Exchange's ability to disseminate 
or update market quotes.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on February 23,1995.\3\ No comment letters were 
received on the proposed rule change. This order approves the 
Exchange's proposal.

    \3\ See Securities Exchange Act Release No. 35388 (February 16, 
1995), 60 FR 10134 (February 23, 1995).
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II. Description of the Proposal

    CBOE proposes to grant the Exchange's Control Room the authority to 
turn off RAES \4\ if there is a system malfunction that affects the 
Exchange's ability to disseminate or update market quotes. 
Specifically, the proposal would add Interpretation .01 to CBOE Rule 
24.15, and Interpretation .03 to Rule 6.8 to grant the senior person 
then in charge of the Exchange's Control Room the authority to turn off 
RAES if there is a system malfunction that affects the Exchange's 
ability to disseminate or update market quotes. The proposed language 
for both Interpretation .01 to Rule 24.15, and Interpretation .03 to 
Rule 6.8 is identical.

    \4\ RAES automatically executes public customer market and 
marketable orders of a certain size against participating market 
makers in the CBOE trading crowd at the best bid or offer reflected 
in the CBOE quotation system. A more detailed description of RAES is 
provided in Securities Exchange Act Release No. 22015 (May 6, 1985), 
50 FR 19832 (May 10, 1985).
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    When an order is entered on RAES, the system automatically attaches 
to the order an execution price, determined by the prevailing market 
quote at the time [[Page 26059]] of the order's entry into the system. 
A buy order will pay the prevailing market quote for an offer and a 
sell order will sell at the prevailing market quote for the bid. A 
market maker who has signed on as a participant in RAES will be 
designated as a contra-broker on the trade; trades are assigned to 
participating market makers on a rotating basis.
    By agreeing to participate in RAES, a market maker is automatically 
assigned trades based on the prevailing market quote that is then being 
disseminated. Consequently, it is important that the prevailing market 
quote be accurate, because otherwise market makers participating in 
RAES may be assigned trades at prices other than the actual prevailing 
market quote. In addition, in the event that incorrect quotes are 
displayed because of a quote dissemination problem, a customer's order 
could be filled at a price other than the quote the customer sees on 
display.
    CBOE believes that the proposed interpretations to Rules 24.15 and 
6.8 are necessary to prevent market makers from being assigned trades 
based on inaccurate or ``stale'' market quotes that are the result of a 
system malfunction, and to prevent customer orders from being filled 
based on such inaccurate or ``stale'' market quotes. CBOE also believes 
that the proposed interpretations are necessary to prevent filling 
customers' orders at prices different from the prices displayed.
    The proposed rule change seeks to address these occurrences by 
vesting the senior person then in charge of the Exchange's Control Room 
with the authority to act quickly to turn off RAES if there is a system 
malfunction that affects the Exchange's ability to disseminate or 
update market quotes.\5\ Because RAES trades are based on the current 
disseminated quote, RAES trades would be based on inaccurate or 
``stale'' quotes during a system malfunction that interferes with 
dissemination of current quote information. The Exchange believes it is 
important for staff persons in the Control Room to have the authority 
to turn off RAES because the Control Room will most likely learn of the 
system malfunction before Floor Officials or other Exchange staff. 
Consequently, Control Room staff can act in a timely manner to prevent 
trades based on ``stale'' market quotes.

    \5\ The CBOE represents that examples of ``systems 
malfunctions'' include: outages of the Exchange's autoquote system; 
communications disruptions between the Exchange and the processor 
for the Options Price Reporting Authority; and the unavailability of 
market data from the underlying market due to systems malfunctions 
in that market or in the communications between that market and 
CBOE. See Letter from Michael Meyer, Attorney, Schiff, Hardin and 
Waite, to John Ayanian, Attorney, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Market Regulation''), 
Commission, dated February 17, 1995.
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    If RAES is turned off because of the circumstances described above, 
the Control Room will disseminate a floor-wide announcement that RAES 
has been turned off,\6\ and the orders that would have been routed to 
RAES will be automatically rerouted to the floor broker printer in the 
trading crowd or to the appropriate member firm booth. Where the order 
is re-routed will depend upon parameters set by member firms for their 
customers' orders prior to entering the orders onto RAES.\7\ If the 
order is not re-routed to the member firm booth, the order will be 
automatically re-routed to the designated floor broker printer, where 
the floor broker assigned to that printer will promptly execute the 
order.\8\

    \6\ The Control Room immediately notifies the floor that RAES 
has been turned off by (1) transmitting a message to the book staff, 
floor broker, and member firm booth printers; (2) announcing it via 
the public address system; (3) posting it on the electronic 
administrative message board located in the pits; and (4) posting it 
on the CBOE bulletin board, which is available from any Exchange 
terminal. Telephone conversation between Tim Watkins, Market 
Operations Department, CBOE, and John Ayanian, Attorney, OMS, Market 
Regulation, Commission, on April 19, 1995.
    \7\ According to CBOE, when determining order parameters for 
routing purposes, the member firms look to (1) the size of the 
order, (2) whether the series is on RAES, and (3) whether it is a 
market order or an immediately executable limit order. Telephone 
conversation between Edward Joyce, CBOE, Michael Meyer, Attorney, 
Schiff, Hardin and Waite, Michael Walinskas, Branch Chief, OMS, 
Market Regulation, Commission, and John Ayanian, Attorney, OMS, 
Market Regulation, Commission, on February 13, 1995.
    \8\ Telephone conversation between Barbara Casey, Market 
Regulation Department, CBOE, and John Ayanian, Attorney, OMS, Market 
Regulation, Commission, on April 18, 1995.
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    Pursuant to the proposed interpretations, once the system 
malfunction has been corrected and the market quotes have been updated, 
either the senior person then in charge of the Exchange's Control Room, 
or the Order Book Official, or the RAES Supervisor may re-start RAES.

III. Commission Finding and Conclusions

    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(b)(5) of the Act.\9\ 
Specifically, the Commission finds that the proposed rule change 
provides a reasonable mechanism for the CBOE to respond to system 
malfunctions that impact the integrity of the RAES system.

    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that this proposal only authorizes the senior 
person in the Control Room to turn off RAES in circumstances that 
involve technical system malfunctions affecting the accuracy of the 
CBOE's automated pricing system. While the Commission understands that 
it is impractical to enumerate every possible system malfunction that 
may affect the accuracy of market quotations, it notes, nonetheless, 
that not all ``stale'' or inaccurate market quotations are the result 
of system malfunctions, and that this proposal does not grant senior 
persons in the Control Room the authority to turn off RAES in these 
other circumstances.
    Finally, the Commission believes that CBOE's alternative routing 
procedures, as proposed for RAES orders in the event of a system 
malfunction, should provide small investors an efficient and effective 
method for order execution in circumstances where RAES is turned off 
pursuant to this rule change.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-CBOE-95-06), is 
approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12002 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M