[Federal Register Volume 66, Number 107 (Monday, June 4, 2001)]
[Notices]
[Pages 30033-30034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13884]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44356; File No. SR-CBOE-00-56]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc.; To Amend Its Rules 
To Allow for Certain Orders Entered Through the Exchange's Order 
Routing System To Automatically Trade Against Orders in the Exchange's 
Customer Limit Order Book

May 25, 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 November 13, 2000, 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. 
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 for certain orders 
entered through the Exchange's Order Routing System (``ORS'') to 
automatically trade against orders in the Exchange's customer limit 
order book. Below is the text of the proposed rule change. Proposed new 
language is in italics.
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Chapter VI--Doing Business on the Exchange Floor

Rule 6.8.B.  Automatic ORS Order Execution Against Booked Orders

    (a) When the best bid or offer on the Exchange's book 
constitutes the best bid or offer on the Exchange, any marketable 
public customer order routed through the Exchange's Order Routing 
System (``ORS'') will be automatically executed against the book up 
to the size of the booked order(s) establishing the best bid or 
offer on the Exchange to the extent such execution is not a price 
inferior to the current best bid or offer in any other market. Any 
remaining balance of the marketable public customer ORS order shall 
be rerouted through ORS and handled in accordance with all 
applicable Exchange rules and policies.
    (b) The appropriate Floor Procedure Committee (``FPC'') may 
determine which option classes will be subject to paragraph (a) of 
this Rule.
    (c) In unusual market conditions, two Floor Officials, the FPC 
Chairman, or the Chairman's designee may exempt an option class from 
paragraph (a) of this Rule.
* * * * *

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 parts 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 the Exchange's Retail 
Automatic Execution System (``RAES'') to trade directly with an order 
on the Exchange's customer limit order book in those cases where the 
best bid (offer) on the Exchange's book is equal to the prevailing 
market bid (offer). ABP has

[[Page 30034]]

aided customers using the RAES system as well as customers whose orders 
are in the Exchange's book, because both categories of orders have been 
executed more quickly than they would have been executed otherwise. 
Further, ABP has been beneficial in helping prevent RAES orders from 
becoming subject to market risk and in preserving the priority of 
booked orders. The Exchange now proposes to expand the application of 
the ABP system to allow booked orders to trade directly with any 
incoming marketable public customer order routed through ORS, as 
opposed to only RAES-eligible orders.
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    \3\ Securities Exchange Act Release No. 41995 (October 8, 1999), 
64 FR 56547 (October 20, 1999).
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    Currently, when a non-RAES eligible order is entered into the 
Exchange's ORS at a time when the prevailing market bid (offer) is 
equal to the best bid (offer) on the Exchange's book, the order is 
routed to a Floor Broker's terminal, a work station in the crowd, or 
the order-sending firm's booth. This helps ensure that the orders are 
handled and executed in a manner that is consistent with CBOE Rule 
6.45, which provides that bids or offers displayed on the customer 
limit order book are entitled to priority over other bids or offers at 
the same price. However, once an order is so routed, that order becomes 
subject to market risk as there may be some delay between the time the 
order is rerouted and the time the order is actually filled in open 
outcry. In times of extreme market volatility, even a short period of 
time between the rerouting and the execution of the order could have a 
significant effect on the price at which the order is executed.
    To remedy this delay in the execution of marketable public customer 
ORS orders, the Exchange proposes to automatically execute incoming 
marketable public customer ORS orders against the customer limit order 
book in instances where a booked limit order represents or equals the 
prevailing best bid (offer). No automatic execution would take place if 
such execution would be a price that is inferior to the current best 
bid (offer) in any other market. The ORS order would be executed up to 
the size of the customer limit order(s) in the book establishing such 
prevailing best bid (offer). Any remaining balance of the ORS order 
would be instantly rerouted through the ORS as if it were a new order, 
which could, among other things, include handling under CBOE's RAES 
Rule (Rule 6.8).
    The proposed change would be contained in proposed new Rule 6.8.B., 
which would further provide that the appropriate Floor Procedure 
Committee (``FPC'') could determine which option classes would be 
subject to the rule. Furthermore, the proposed rule would allow two 
Floor Officials, the FPC Chairman, or the Chairman's designee to 
attempt an option class or classes from the proposed rule's 
requirements if warranted by unusual market conditions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of section 6(b)(5) of the Act \4\ 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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    \4\ 15 U.S.C. 78f(b)(5).
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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 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 disapproved.

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 20594-0609. 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-00-56 and should be 
submitted by June 25, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13884 Filed 6-1-01; 8:45 am]
BILLING CODE 8010-01-M