[Federal Register Volume 66, Number 89 (Tuesday, May 8, 2001)]
[Notices]
[Pages 23283-23285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11474]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44244; File No. SR-CBOE-2001-12]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. To Amend Its Rules Governing Split-Price Executions on 
Its Retail Automatic Execution System

May 1, 2001.
    Pursuant to Section 19(b)(1) of the Securities and Exchange Act of 
1934 (``Act''),\1\ and the Rule 19b-4 thereunder,\2\ notice is hereby 
given that March 16, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 CBOE proposes to amend its rules to provide that the 
applicability of the split-price execution functionality for RAES 
orders may be determined by the appropriate Floor Procedure Committee 
on a class-by-class basis. Below is the text of the proposed rule 
change. New text is in italics. Proposed deletions are in [brackets].
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.8. RAES Operations

    This Rule governs RAES operations in all classes of options, except 
to the extent otherwise expressly provided in this or other Rules in 
respect of specified classes of options.
    (a) (i) Firms on the Exchange's Order Routing System (``ORS'') will 
automatically be on the Exchange's Retail Automatic Execution System 
(``RAES'') for purposes of routing small public customer market or 
marketable limit orders into the RAES system. Those orders which are 
eligible for routing to RAES may be subject to such contingencies as 
the appropriate Floor Procedure Committee (``FPC'') shall approve. 
Public customer orders are orders for accounts other than accounts in 
which a member, non-member participant in a joint-venture with a 
member, or any non-member broker-dealer (including a foreign broker-
dealer as defined in Rule 1.1(xx)) has an interest. The appropriate 
Floor Procedure Committee (``FPC'') shall determine the size of orders 
eligible for entry into RAES in accordance with paragraph (e) of this 
Rule. For purposes of determining what a small customer order is, a 
customer's order cannot be split up such that its parts are eligible 
for entry into RAES. Firms on ORS have the ability to go on and off ORS 
at will. Firms not on ORS that wish to participate will be given access 
to RAES from terminals at their booths on the floor.
    (ii) When RAES receives an order, the system automatically will 
attach to the order its execution price, determined by the prevailing 
market quote at the time of the order's entry to the system, except as 
otherwise provided in paragraph (b) of this Rule in instances where the 
best bid or offer on the Exchange's book constitutes the prevailing 
market best bid or offer, and as otherwise provided in Interpretation 
and Policy .02 under this Rule 6.8 in respect of multiply-

[[Page 23284]]

traded options. A buy order will pay the offer, a sell order will sell 
at the bid. A Market-Maker logged on to participate in RAES (a 
``Participating Market-Maker'') will be designated as contra-broker on 
the trade. A trade executed on RAES at an erroneous quote should be 
treated as a trade reported at an erroneous price and adjusted to 
reflect the accurate market after receiving a Floor Official's 
approval.
    (iii) This rule shall apply to RAES in classes handled by DPM's 
except that the MTS Appointments Committee may make available 
additional series or raise the size of eligible orders in a DPM's 
classes pursuant to Rule 8.80.
    (b) When the best bid or offer on the Exchange's book constitutes 
the best bid or offer on the Exchange, contra-side incoming RAES orders 
shall be executed in accordance with either (i) or (ii) below, as 
determined by the appropriate Floor Procedure Committee on a class-by-
class basis.
    (i) When the best bid or offer on the Exchange's book constitutes 
the best bid or offer on the Exchange and is for a size less than the 
RAES order eligibility size for that class, such fact shall be denoted 
in the Exchange's disseminated quote by a ``Book Indicator.'' [It is 
possible that the best bid or offer on the Exchange's book constitutes 
the prevailing market bid or offer. In those instances, a] An incoming 
RAES order will be executed against the order in the book. In the 
event, the order in the book is for a smaller number of contracts than 
the RAES order, the balance of RAES order will be assigned to 
participating market-makers at the same price at which the initial 
portion of the order was executed up to an amount prescribed by the 
appropriate Floor Procedure Committee on a class-by-class basis (the 
``Book Price Commitment Quantity''). Any remaining balance thereafter 
shall be (i) routed to the crowd PAR terminal if Autoquote is not in 
effect for that series; (ii) assigned to participating market-makers at 
the Autoquote price if Autoquote constitutes the new prevailing market 
bid or offer; or (iii) executed against any order in the book that 
constitutes the new prevailing market bid or offer with the balance of 
the RAES order being assigned to participating market-makers at that 
price up to the Book Price Commitment Quality. Any additional remaining 
balance of a RAES order shall be handled in accordance with (ii) or 
(iii) of this paragraph.
    (ii) An incoming RAES order will be executed against the order in 
the book. In the event the order in the book is for a smaller number of 
contracts than the RAES order, the balance of the RAES order will be 
assigned to participating market-makers at the same price at which the 
initial portion of the RAES order was executed.
    (c)-(g) Unchanged.
    * * * Interpretations and Policies:
    .01-.08 Unchanged.
* * * * *

II. Self-Regulatory Organization's Statement of the Purposed of, 
and Statutory Basis for, the Propose Rule Change

    In its filing with the Commission, 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 December 1, 1998, the Commission approved a CBOE rule change 
establishing the Exchange's Automated Book Priority System 
(``ABP'').\3\ ABP allows an order entered into RAES to trade directly 
with an order on the Exchange's customer limit order book in those 
cases where the best bid or offer on the Exchange's book is equal to 
the prevailing market bid or offer. As originally approved, ABP 
provided that in the event the order in the book was for a smaller 
number of contracts than the RAES order, the entire balance of the RAES 
order would be assigned to participating market-makers at the same 
price at which the initial portion of the order was executed against 
the book, regardless of the next prevailing best bid or offer on the 
Exchange. Thus, if the book contained an order for one contract that 
represented the best bid, an incoming market order to sell 50 contracts 
would execute against the book for one contract and then against the 
trading crown for 49 contracts at the book price, regardless of the 
trading crowd's best bid.
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    \3\ Securities Exchange Release No. 41995 (October 8, 1999), 64 
FR 56547 (October 20, 1999).
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    On February 6, 2001, the Commission approved a CBOE rule change 
filing to enhance ABP to provide that RAES orders subject to ABP be 
executed against the book price up to the applicable book size or a 
larger amount as pre-determined by the appropriate Floor Procedure 
Committee (``FPC'') for the subject option class.\4\ The rule change 
allows for split-price executions on RAES when the CBOE's best bid 
(offer) is established by an order in CBOE's book that is for a smaller 
size than the RAES contract execution guarantee. However, as approved, 
the revised rule does not allow for a controlled class by class 
implementation of the split-price functionality.
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    \4\ Securities Exchange Act Release No. 43932 (February 6, 
2001), 66 FR 10332 (February 14, 2001).
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    Accordingly, CBOE now seeks to modify that rule to merely provide 
that the applicability of the split-price execution functionality to a 
particular option class be determined by the FPC, Thus, the FPC would 
pre-determine, on a class by class basis, if incoming RAES orders will 
be subject to split-price executions when the CBOE's best bid (offer) 
is established by a booked order, or if incoming RAES orders will be 
executed in their entirety at the booked order's price as has been the 
case since the inception of ABP. The CBOE believes the change will 
provide the Exchange with the needed flexibility to roll out the split-
price functionality in a controlled manner.
2. Statutory Basis
    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of the Act,\5\ in that it is designed to 
remove impediments to a free and open market and to protect investors 
and the public interest.
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes 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

    Because the foregoing rule change establishes a change in an 
existing CBOE trading system that does not significantly affect the 
protection of investors or the public interest, that

[[Page 23285]]

does not impose any significant burden on competition, and that does 
not have the effect of limiting the access to or availability of the 
system, it has become effective pursuant to Section 19(b)(3)(A) of the 
Act \6\ and subparagraph (f)(5) of the Rule 19b-4 thereunder.\7\ At any 
time within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(5).
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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-
0609. Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are fled 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. CBOE-2001-12 and should 
be submitted by May 29, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-11474 Filed 5-7-01; 8:45 am]
BILLING CODE 8010-01-M