[Federal Register Volume 66, Number 44 (Tuesday, March 6, 2001)]
[Notices]
[Pages 13599-13601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5330]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44008; File No. SR-CBOE-01-03]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to the Maximum Size of Options 
Orders Eligible for Automatic Execution

February 27, 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 February 8, 2001, 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. For the reasons discussed 
below, the Commission is granting accelerated approval of the proposed 
rule change.
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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 governing the operation of its 
Retail Automatic Execution System (``RAES'') to increase the maximum 
order size eligibility for RAES from seventy-five contracts to one 
hundred contracts. 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 III below. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 13600]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to increase from 
seventy-five contracts to one hundred contracts the maximum size of 
orders for equity and index options that are eligible to be executed 
through RAES.\3\
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    \3\ RAES is the Exchange's automatic execution system for public 
customer market or marketable limit orders of less than a certain 
size.
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    Currently, the maximum size of RAES-eligible orders is seventy-five 
contracts for all classes of options traded on the CBOE for which a 
greater maximum is not expressly provided in the rules.\4\ Options 
subject to the seventy-five contract maximum include all classes of 
equity options, all classes of sector index options and all other 
classes of index options except options on the S&P 500 index, options 
on the Nasdaq 100 index, options on the Dow Jones Industrial Average 
(``DJIA''), options on the High Yield Select Ten, and interest rate 
options.\5\
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    \4\ See Securities Exchange Act Release No. 43517 (November 3, 
2000), 65 FR 69082 (November 15, 2000).
    \5\ The RAES eligibility maximum is currently one hundred 
contracts for options on the S&P 500 Index, the Nasdaq 100 Index, 
the DJIA, the High Yield Select Ten, and interest rate options. See 
supra note 4.
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    Increasing the RAES eligibility maximum to one hundred contracts 
for these classes of options will not automatically permit orders up to 
this size to be entered into RAES. Instead, the actual maximum RAES 
eligibility size is established by the appropriate Floor Procedure 
Committee (``FPC'') of the Exchange, which may maintain the maximum for 
particular classes at levels below the one hundred contract maximum 
that would be allowable under the proposed rule change.
    The CBOE represents that increasing automatic execution levels will 
provide the benefits of automatic execution to a larger number of 
customer orders. The CBOE also represents that RAES affords prompt and 
efficient executions at the CBOE displayed price or, in many cases, at 
the current best bid or offer in another market if the current best bid 
or offer in that market is better than the CBOE'S displayed bid or 
offer.\6\
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    \6\ Interpretation .02 to CBOE Rule 6.8 provides, in pertinent 
part, that: orders to buy or sell options that are multiply traded 
in one or more markets in addition to the Exchange will not be 
automatically executed on RAES at prices inferior to the current 
best bid or offer in any other market, as such best bids or offers 
are identified in RAES. In respect of those classes of options that 
have been specifically designated by the appropriate FPC as coming 
within the scope of this sentence (``automatic step-up classes''), 
under circumstances where the Exchange's best bid or offer is 
inferior to the current best bid or offer in another market by no 
more than the ``step-up amount'' as defined below, such orders will 
be automatically executed on RAES at the current best bid or offer 
in the other market.
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    The Exchange notes that there are a number of safeguards 
incorporated into Exchange rules to ensure the appropriate handling of 
RAES orders, even as the maximum order size is being increased. The 
Exchange rules require CBOE Designated Primary Market-Makers to 
participate in any automated execution system which may be open in 
appointed option classes (CBOE Rule 8.85(a)(ix)), and state that market 
makers are expected to participate in and support Exchange-sponsored 
automated programs, including, but not limited to, RAES (Interpretation 
.07 to CBOE Rule 8.7). CBOE Rule 8.16(b) requires a market maker who 
has logged onto RAES at any time during an expiration month to log onto 
RAES in that option class whenever he is present in the trading crowd 
until the next expiration. CBOE Rule 8.16(c) states that, if there is 
inadequate participation on RAES, then Floor Officials of the 
appropriate Market Performance Committee may require market makers who 
are members of the trading crowd to log on RAES absent reasonable 
justification or excuse for non-participation, or the Floor Officials 
may allow market makers in other classes of options to log on RAES in 
such classes.
    In addition, the Exchange does not believe that raising the maximum 
order size will create materially greater risks for CBOE market maker 
participants. The Exchange believes that the implementation of the 
Variable RAES and the 100 Spoke RAES Wheel order assignment 
methodologies on the CBOE provide safeguards to market makers from 
excessive risk from any one RAES order.\7\
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    \7\ See Securities Exchange Act Release Nos. 41821 (September 1, 
1999), 64 FR 50313 (September 16, 1999) (implementing Variable 
RAES); and 42824 (May 25, 2000), 65 FR 37442 (June 14, 2000) 
(implementing the 100 Spoke RAES Wheel).
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    The Exchange believes that the proposed increase should provide 
customers with quicker executions for a larger number of orders, by 
providing automatic rather than manual executions, thereby reducing the 
amount of orders subject to manual processing. In support of its 
proposal to increase the RAES eligibility maximum, the CBOE represents 
that its systems capacity is sufficient to accommodate the increased 
number of automatic executions anticipated to result from the 
implementation of this proposal.
2. Statutory Basis
    The Exchange believes that the proposed rule change will enhance 
the ability of the Exchange to provide instantaneous automatic 
execution of public customers' orders at the best available prices, 
which is consistent with section 6(b) \8\ of the Act in general, and 
furthers the objectives of section 6(b)(5) of the Act \9\ in 
particular, in that it is designed to facilitate transactions in 
securities, to promote just and equitable principles of trade, to 
enhance competition and to protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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 Proposed Rule Change and Timing for 
Commission Action

    The CBOE requests that the proposed rule change be given 
accelerated effectiveness pursuant to section 19(b)(2)\10\ of the Act. 
The Exchange believes that expanding the number of contracts in 
selected option classes eligible to be entered into RAES will make the 
benefits of assured, instantaneous, automatic execution available to a 
larger number of customer orders, and will allow the Exchange to 
compete with other options exchanges which have received approval to 
increase their maximum order size for automatic executions to one 
hundred contracts.\11\
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    \10\ 15 U.S.C. 78(b)(2).
    \11\ The Commission notes that it has approved similar proposals 
filed by the American Stock Exchange LLC (``Amex'') and the Pacific 
Exchange, Inc. (``PCX''). See Securities Exchange Act Release No. 
43887 (January 25, 2001), 66 FR 8831 (February 2, 2001) (order 
approving SR-Amex-00-57 and PCX-00-18).
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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

[[Page 13601]]

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 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-01-03 and should 
be submitted by March 27, 2001.

V. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, 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 of the Act. Among 
other provisions, section 6(b)(5) of the Act requires that the rules of 
an exchange be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating securities transactions; 
remove impediments to and perfect the mechanism of a free and open 
market and a national securities system; and protect investors and the 
public interest.\12\
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    \12\ 15 U.S.C. 78f(b)(5).
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    Pursuant to section 19(b)(2) \13\ of the Act, the Commission finds 
good cause for approving the proposed rule change prior to the 30th day 
after the date of publication of notice thereof in the Federal 
Register.\14\ The Commission believes that granting accelerated 
approval will provide the CBOE will flexibility to compete for order 
flow with other exchanges immediately.\15\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \15\ See supra note 11.
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    While increasing the maximum order size limit from seventy-five to 
one hundred contracts for automatic execution eligibility by itself 
does not raise concerns under the Act, the Commission believes that 
this increase raises collateral issues that the CBOE will need to 
monitor and address. Increasing the maximum order size for particular 
option classes will make a larger number of option orders eligible for 
RAES. These orders may benefit from greater speed of execution, but at 
the same time create greater risks for market maker participants. 
Market makers signed onto RAES will be exposed to the financial risks 
associated with larger-sized orders being routed through the system for 
automatic execution at the displayed price. When the market for the 
underlying security changes rapidly, it may take a few moments for the 
related option's price to reflect that change. In the interim, 
customers may submit orders that try to capture the price differential 
between the underlying security and the option. The larger the orders 
accepted through RAES, the greater the risk market makers must be 
willing to accept. The Commission does not believe that, because the 
CBOE's appropriate FPC determines to approve orders as large as one 
hundred as eligible for RAES, the FPC or any other CBOE committee or 
officials should disengage RAES more frequently by, for example, 
declaring a ``fast'' market. Disengaging RAES can negatively affect 
investors by making it slower and less efficient to execute their 
option orders. It is the Commission's view that the CBOE, when 
increasing the maximum size of orders that can be sent through their 
respective automatic execution systems, should not disadvantage all 
customers--the vast majority of whom enter orders for less than one 
hundred contracts--by making their automatic execution systems less 
reliable.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed change (SR-CBOE-01-03) is hereby approved on 
an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5330 Filed 3-5-01; 8:45 am]
BILLING CODE 8010-01-M