[Federal Register Volume 66, Number 94 (Tuesday, May 15, 2001)]
[Notices]
[Pages 26889-26890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12135]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44258; File No. SR-CBOE-2001-20]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to Prohibition Against Members 
Functioning as Market Makers

May 4, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 12, 2001, the Chicago Board Options Exchange, Incorporated 
(``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 CBOE. The Exchange has designated the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act,\3\ which renders the proposal effective 
upon receipt of this filing by the Commission. 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.
    \3\ 17 CFR 240.19b(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to adopt a new Rule 6.8C, Prohibition Against 
Members Functioning as Market-Makers, which restricts the entry of 
certain option limit orders. 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, Proposed Rule Change 

1. Purpose
    The Exchange proposes to adopt new Rule 6.8C, Prohibition Against 
Members Functioning as Market-Makers, which will restrict the entry of 
certain option limit orders into the Exchange's electronic Order 
Routing System (``ORS''). The proposed new rule provides that member 
firms, acting as either principal or agent, may neither enter nor 
permit the entry of orders into ORS if the orders are limit orders for 
the account or accounts of the same beneficial owners and limit orders 
are entered in such a manner that the beneficial owner(s) effectively 
is operating as a market maker by holding itself out as willing to buy 
and sell such securities on a regular or continuous basis. In 
determining whether a beneficial owner effectively is operating as a 
market-maker, the Exchange will consider, among other things, the 
simultaneous or near simultaneous entry of limit orders to buy and sell 
the same security; the multiple acquisition and liquidation of 
positions in the security during the same day; and the entry of 
multiple limit orders at different prices in the same security.
    The Exchange states that its business model depends upon Designated 
Primary Market-Makers (``DPMs'') and market makers for competition and 
liquidity. To encourage participation by these market makers, the 
Exchange needs to limit the ability of members that are not DPMs or 
market makers to compete on preferential terms within its automated 
systems. In addition, because customers' orders are provided with 
certain benefits such as automatic execution, priority of bids and 
offers and firm quote guarantees, and customers should not be allowed 
to act as market makers. The proposed rule will prevent non-DPM/market 
maker members and their customers from reaping the benefits of market 
making activities without any of the concomitant obligations, such as 
providing continuous quotations during all market conditions. The 
proposed rule is designed to prevent certain members and customers from 
obtaining an unfair advantage by acting as unregistered DPMs and market 
makers by virtue of their customer status. Permitting members (other 
than DPMs or market makers) or customers to enter multiple limit orders 
to such an extent that they are effectively acting as market makers in 
an option, while not requiring them to fulfill the obligations imposed 
upon registered market makers, would give such members and customers an 
inordinate advantage over other market participants.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\4\ in general and furthers the objectives of Section 6(b)(5) \5\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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 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

    The proposed rule change has been filed as a ``non-controversial'' 
rule change pursuant to Section 19(b)(3)(A) of the Act \6\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\7\ Because the foregoing 
rule change: (i) does not significantly affect the protection of 
investors or the public interest; (ii) does

[[Page 26890]]

not impose any significant burden on competition; and (iii) by its 
terms, does not become operative for 30 days after the date of the 
filing, or such shorter times as the Commission may designate if 
consistent with the protection of investors and the public interest; 
and the Exchange has given the Commission written notice of its intent 
to file the proposed rule change at least five business days prior to 
the filing date of the proposed rule change, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6).
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 C.F.R. 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date of the proposal. In addition, the Exchange provide the 
Commission with notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
more than five business days prior to the date of the filing of the 
proposed rule change.
    The Commission finds that it is appropriate to accelerate the 
operative date of the proposal and designate the proposal to become 
effective today.\8\ The Commission has approved similar proposals filed 
by the other options exchange.\9\ Approval of this proposal on an 
accelerated basis will enable the Exchange to compete on an equal basis 
with these other exchanges and thus is consistent with Section 6(b)(8) 
of the Act.\10\
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    \8\ For purposes only of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competititon, and capital formation. 15 U.S.C. 
78c(f).
    \9\ See Securities Exchange Act Release No. 43938 (February 7, 
2001), 66 FR 10539 (February 15, 2001) (approving SR-Amex-01-03); 
and Securities Exchange Act Release No. 42455 (February 24, 2000), 
65 FR 11388 (March 2, 2000) (approving application of ISE for 
registration as a national securities exchange).
    \10\ 15 U.S.C. 78f(b)(8).
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    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 Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
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 file number SR-CBOE-2001-20 and should be 
submitted by June 5, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12135 Filed 5-14-01; 8:45 am]
BILLING CODE 8010-01-M