Federal Register / Vol. 66, No. 104 / Wednesday, May 30, 2001 / Notices 29371

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

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the CBOE described the

circumstances in which a Designated Primary

Market Maker (‘‘DPM’’) may disengage and

reactivate PACER. In addition, Amendment No. 1

also made technical corrections to the language of

the proposed rule change. See letter from Stephen

M. Youhn, Attorney, CBOE, to Gordon Fuller,

Counsel to the Assistant Director, Division of

Market Regulation, SEC, dated April 19, 2001.

Amendment No. 1 is discussed in more detail in

Section II.A. below.

4While the appropriate FPC shall establish the

length of the PACER interval, the Designated

Primary Market Maker (‘‘DPM’’) for a particular

class, with input from the trading crowd, shall have

the ability to disengage and reactivate the order

PACER for that class under the circumstances set

forth in Amendment No. 1. These circumstances are

discussed below.

5ABP is an acronym for the Exchange’s

Automated Book Priority system. ABP enables a

RAES order to execute against the book when the

book represents the best price on the Exchange. See

Securities Exchange Act Release No. 41995 (October

8, 1999), 64 FR 56547 (October 20, 1999) (SR–

CBOE–99–29). Under ABP Split Price, if an

incoming RAES order is larger than a booked order

that is establishing the Exchange’s best price, the

RAES order will be executed against the booked

order. Formerly, the remainder of that RAES order

would be executed in its entirety at the book price

against market-makers participating on RAES.

Under ABP Split Price, the RAES order is only

executed at the booked price up to a pre-set ‘‘Book

Continued

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44339; File No. SR–CBOE–

2001–16]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 Thereto by the

Chicago Board Options Exchange,

Incorporated Relating to the Proposed

Order ‘‘PACER’’

May 22, 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 2,

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 the CBOE. On April 20,

2001, the CBOE submitted to the

Commission Amendment No. 1 to the

proposed rule change.3 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 proposes to amend its rules

to add a new parameter, the order

PACER, to its Order Routing System

(‘‘ORS’’). PACER will enable the CBOE

to modulate the frequency of executions

through the Exchange’s Retail

Automatic Execution System (‘‘RAES’’).

Below is the text of the proposed rule

change, as amended by Amendment No.

1. Proposed new language is italicized.

Rule 6.8: RAES Operations

(d)(vi)

The appropriate Floor Procedure

Committee (‘‘FPC’’) may regulate the

frequency of executions through RAES. To

regulate the frequency, the FPC may institute

a ‘‘PACER interval’’ applicable to a member

firm’s RAES orders on the same side of the

market within a given class of options. The

PACER interval, which shall be activated by

an initial RAES execution, shall prohibit

subsequent RAES executions by the same

member firm on the same side of the market

within the same class until a set amount of

time (the PACER interval) expires. Upon

expiration of the PACER interval, that

member firm would again be entitled to

receive RAES executions in that class, subject

to subsequent PACER restrictions. The

appropriate FPC shall determine the length

of the PACER interval. RAES-eligible orders

received during the PACER interval shall be

routed to PAR. The PACER interval shall not

be applicable to orders that execute against

EBOOK.

When there is a large influx of orders that

route from RAES that are rerouted for

manual handling such that there are more

orders than can be handled expeditiously,

the DPM for the class, with input from the

trading crowd, shall have the ability to

disengage the order PACER for that class.

When the influx of orders subsides such that

orders may be handled expeditiously, the

DPM in the affected class, upon receipt of

approval by two Floor Officials, may

reactivate PACER in the affected class.

For purposes of this rule, long (short) calls

and short (long) puts shall be considered to

be on the same side of the market.

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

1. Purpose

The Exchange proposes to amend

CBOE Rule 6.8(d) to enable the

appropriate Floor Procedure Committee

(‘‘FPC’’) to limit the frequency with

which member firms can receive

executions through RAES. Under the

proposal, CBOE will add a new

parameter, the order PACER, that will

enable it to modulate the frequency of

executions through RAES. The CBOE

represents that the proposal is designed

to permit customers to continue to

receive the benefits of automatic

execution of their small option orders

while at the same time allowing market

makers to limit their exposure to

artificial depth.

When PACER is engaged, individual

member firms will be entitled to

execute, in a particular class, one RAES

order (regardless of series) on the same

side of the market every designated

number of seconds. The appropriate

FPC shall determine and establish the

length of time for the PACER interval

setting on a class-by-class basis.4 If the

PACER interval is established at five

seconds, each individual member firm

would be entitled to receive one

execution through RAES for all orders

in all series within the same class on the

same side of the market per five-second

interval. For purposes of this proposal,

the following orders shall be deemed to

be on the same side of the market:

• Long calls and short puts (bullish

side of the class)

• Short calls and long puts (bearish

side of the class)

For example, if Firm XYZ executes an

order through RAES to buy 50 calls for

a particular option, it would be

ineligible to receive additional RAES

executions for either long calls or short

puts in any series of that option class

until the PACER interval period

expired. Firm XYZ orders on the

opposite side of the market (i.e., short

calls and long puts) would be eligible

for execution, subject to the PACER

parameters applicable to the opposite

side of the market (i.e., one order

execution every x seconds). Firms

XYZ’s RAES-eligible orders sent

through ORS that are received during

the period the PACER interval precludes

automatic execution (i.e., before x

seconds expire) would not be routed to

RAES and instead would be sent to PAR

where they would be handled in

accordance with applicable procedures.

The PACER interval will apply only

to RAES orders that would be assigned

to market makers via standard RAES

allocation methods (e.g., the Wheel or

Variable RAES). As such, the PACER

interval would not apply to RAES

orders executed against EBOOK via ABP

or ABP Split-Price.5 As an example, if

29372 Federal Register / Vol. 66, No. 104 / Wednesday, May 30, 2001 / Notices

Price Commitment Quantity’’ set by the FPC.

Thereafter, if any part of the RAES order is still

unfilled, the remainder will be executed at the next

prevailing bid or offer, i.e., the book price or the

Autoquote price. If the Autoquote system is not in

effect, the remainder of the RAES order would be

routed to the crowd PAR terminal for manual

execution, whether against the book or competing

members of the trading crowd. See Securities

Exchange Act Release No. 43932 (February 6, 2001),

66 FR 10332 (February 14, 2001) (SR–CBOE–00–

21).

6Amendment No. 1, supra note 3.

7CBOE Rule 6.8.08 states that ‘‘[t]he Exchange

will document in its Control Room log, or in any

other format provided for by the Exchange, any

action taken to disengage RAES or to operate RAES

in a manner other than normal, the option classes

affected by such action, the time such action was

taken, the Exchange officials who undertook such

action, and the reasons why such action was

taken.’’

8See Amendment No. 1, supra note 3. 9 15 U.S.C. 78(f)(b)(5). 10 17 CFR 200.30–3(a)(12).

the EBOOK represents the best price for

a series along with Autoquote and ORS

receives three RAES-eligible orders to

buy the same series (submitted by the

same member firm), the first order

would be executed against the EBOOK

(extinguishing the order on the book).

The second order would be executed in

RAES, activating the PACER interval

timer. The third order, because it was

received during the period the PACER

interval was activated, would not

receive automatic execution and instead

would be routed to the PAR station.

In Amendment No. 1, the CBOE

revised the language of proposed Rule

6.8(d)(vi) to clarify the circumstances in

which the DPM for a particular class

may disengage and reactivate PACER for

that class. The Amendment states that

the DPM may disengage PACER for a

particular class, with input from the

trading crowd, ‘‘[w]hen there is a large

influx of orders that route from RAES

that are rerouted for manual handling

such that there are more orders than can

be handled expeditiously * * * .’’ 6

When the influx of orders subsides such

that orders may again be handled

expeditiously, the DPM in the affected

class may activate PACER for that class

upon receipt of approval by two Floor

officials. In this connection, the CBOE

represents that it will comply in all

respects with CBOE Rule 6.8.08.7

Specifically, the CBOE states that it will

document all instances in which PACER

is disengaged in a class and

subsequently reengaged during the same

trading day, the reasons for such action,

and the identity of the Floor Officials

involved in the decision to reengage

PACER.8

In addition, in Amendment No. 1 the

CBOE represented that it expects that

PACER will be activated floor-wide in

all classes under normal market

conditions. The CBOE stated that, while

the Equity FPC (‘‘EFPC’’) retains the

authority to establish the length of the

PACER interval, the EFPC normally

meets only once every two weeks. This

will preclude it from determining to

alter the length of the PACER interval

on an intraday basis. The CBOE stated

that, as indicated in the original filing,

the EFPC has the authority to deactivate

PACER for a particular class or to

establish the length of the PACER

interval on a class-by-class basis. The

CBOE represented that it will post on its

public website the length of the PACER

interval applicable to all affected

classes.

2. Statutory Basis

The Exchange believes the proposal

represents an efficient mechanism

whereby customers can continue to

receive the benefits of automatic

execution of their small option orders

while at the same time allowing market

makers to limit their exposure to

artificial depth. For these reasons, the

Exchange believes the proposal is

consistent with the Act and the rules

and regulations under the Act

applicable to a national securities

exchange and, in particular, the

requirements of section 6(b) of the Act.

Specifically, the Exchange believes the

proposed rule change is consistent with

the requirements under section 6(b)(5) 9

that the rules of an exchange be

designed to promote just and equitable

principles of trade, to prevent

fraudulent and manipulative acts and

practices, and, in general, to protect

investors and the public interest.

Furthermore, the Exchange believes that

the proposed rule change is consistent

with the Act’s requirement that an

exchange’s rules not be designed to

permit unfair discrimination between

customers, issuers, brokers, or dealers.

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 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

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 Exchange 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, as amended, 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 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–2001–16 and should be

submitted by June 20, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–13532 Filed 5–29–01; 8:45 am]

BILLING CODE 8010–01–M