1706 Federal Register / Vol. 66, No. 6 / Tuesday, January 9, 2001 / Notices

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

2 17 CFR 240.19b–4.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43789; File No. SR–CBOE–

00–41]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. To Amend Its Rule Governing the

Operation of Its Firm Quote Rule To

Permit Split-Price Executions

January 2, 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 August

18, 2000, the Chicago Board Options

Exchange, Inc. (‘‘CBOE’’ or ‘‘Exchange’’)

field with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed new rule as described in Items

I, II, and III below, which Items have

been prepared by the Exchange.The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to amend its

rule governing the operation of its Firm

Quote Rule to permit split-price

executions. Below is the text of the

proposed rule change. Proposed new

language is italicized, and proposed

deletions are in brackets.

* * * * *

Rule 8.51 Trading Crowd Firm

Disseminated Market Quotes

(a) The classes and series which shall

be subject to the requirements of this

rule will be determined at the discretion

of the appropriate Market Performance

Committee (‘‘MPC’’).

(1) Only non-broker dealer customer

orders shall be entitled to an execution

pursuant to the provisions of this

paragraph (a). For the purposes of this

Rule, the term broker-dealer includes

foreign broker-dealers as defined in Rule

1.1(xx).

(2) The firm quote requirement shall

be no less than the RAES contract limit

applicable to that class of options.

However, the appropriate Floor

Procedure committee, in its discretion,

may establish a different firm quote

requirement for a particular class of

options that is no less than the RAES

contract limit and no more than 50

contracts. For classes or series that are

not traded on RAES, the appropriate

Floor Procedure Committee may

establish a firm quote requirement of

between 10 and 50 contracts. The firm

quote requirement applies at all times

other than during rotation, unless there

is a contrary Floor Official ruling

pursuant to subparagraph (3) of this

paragraph (a). Except as provided in

sub-paragraph (3) below with respect to

the price at which an order must be

executed, the firm quote requirement

obligates a trading crowd to sell (buy) at

lease the established number of

contracts at the offer (bid) which is

displayed when a buy (sell) order

reaches the trading station where the

particular option class is located for

trading. The Exchange may establish a

higher firm quote requirement, of up to

100 contracts, for the trading crowd for

options on the Dow Jones Industrial

Average. Except in the case of rerouted

RAES orders that are eligible for the

RAES kickout price in accordance with

Interpretation .04 to Rule 6.8, an order

ordinarily will be deemed to reach the

trading station when a Floor Broker

represents the order in open outcry at

the trading station.

(3)(A) It is possible that the prevailing

market bid or offer may be equal to the

best bid or offer on the Exchange’s book.

In those instances, and in the event the

order in the book is for a smaller

number of contracts than the

represented order, the balance of the

represented order must be executed at

no worse than the same price at which

the initial portion of the order was

executed up to an amount prescribed by

the appropriate Market Performance

Committee on a class-by-class basis (the

‘‘Book Price Commitment Quantity’’)

Any portion of the order remaining to be

executed after the trading crowd has

executed the Book Price Commitment

Quantity at the disseminated best bid or

offer will be required to be executed at

least at (i) the price of any other order(s)

in the book that then constitutes the

new prevailing market bid or offer for

the quantity of such order(s); or (ii) the

market-maker disseminated price if that

price constitutes the new prevailing

market bid or offer (after the booked

order(s) has been traded) for the entire

remainder of the order. So long as an

order in the book constitutes the new

prevailing market bid or offer, any

remaining balance of the order will be

handled in accordance with (i) or (ii) of

this paragraph, in such order.

(B) The market-maker disseminated

price is the displayed price which

reflects either the price established by

(1) the Exchange’s Autoquote system; (2)

another quoting system operated by a

trading crowd market-maker, including

the Designated Primary Market-Maker;

or (3) a verbalized quote by a member

of the trading crowd.

(C) Generally, the Book Price

Commitment Quantity for a particular

option class will be equal to the Book

Price Commitment Quantity established

pursuant to paragraph (b) of Rule 6.8.

However, the appropriate Market

Performance Committee may determine

to establish a different Book Price

Commitment Quantity for any particular

option class.

[(3)] (4) When orders for the same

class (whether for the same series or

different series) from the same

beneficial owner are represented at the

trading station at approximately the

same time, then only the first of such

orders that cumulatively equal or add

up to less than the firm quote

requirement shall be entitled to an

execution pursuant to paragraph (a)(2)

above.

[(4)] (5) On a case by case basis, any

two Floor Officials may grant

exemptions to or suspend the provisions

of this paragraph (a) for either a class or

series within a class if, in their

determination, to do so is in the interest

of a fair and orderly market.

Additionally, any two Floor Officials

may determine that an exemption to

Rule 8.51(a) is warranted, on a case by

case basis, upon their determination

that an obvious error occurred in the

posting of the disseminated market

quote.

[(5)] (6) The senior person then in

charge of the Exchange’s Control Room

shall have the authority to suspend the

firm quote requirements of this

paragraph (a) with respect to a class of

options if a system malfunction or other

circumstance impairs the Exchange’s

ability to disseminate or update market

quotes in a timely and accurate manner.

After exercising such authority, that

senior person shall immediately seek

approval by two Floor Officials, who

may confirm or overrule the decision. If

this authority is invoked, the Exchange’s

Control Room will disseminate a

message notifying the public that the

displayed quotes are not firm because of

a data dissemination problem. Once the

problem has been corrected and the

market quotes have been updated, the

suspension of the firm quote

requirements of paragraph (a), shall be

lifted by either the senior person then in

charge of the Exchange’s Control Room,

or by two Floor Officials.

(b) With respect to orders (or portions

of orders) at the displayed offer (bid),

that are not entitled to an execution

pursuant to the provisions of paragraph

(a), the trading crowd is required to

either.

Federal Register / Vol. 66, No. 6 / Tuesday, January 9, 2001 / Notices 1707

3See Securities Exchange Act Release No. 43430

(October 11, 2000), 65 FR 62776 (October 19, 2000)

(SR–CBOE–00–21).

4That pre-determined contract amount, to be

called the ‘‘Book Price Commitment Quantity,’’

would be determined by the FPC, and could set

from zero contracts up to the maximum RAES

eligible order size for that option class. Thus, if the

book contains an order for one contract that

represents the best bid, and the Book Price

Commitment Quantity is set to 40, an incoming

market order to sell 50 contracts would execute

against the book for one contract and execute

against the trading crowd for 39 contracts on RAES

at the book price.

5The market-maker disseminated price is the

displayed price which reflects either the price

established by (1) the Exchange’s Autoquote system;

(2) another quoting system operated by a trading

crowd market-maker, including the Designated

Primary Market-Maker; or (3) a verbalized quote by

a member of the trading crowd.

6 15 U.S.C. 78f(b).

7 15 U.S.C. 78f(b)(5).

(1) sell (buy) the number of contracts

specified in the order pursuant to the

rules of execution described in

paragraph (a) (2) and (3); or

(2) change the displayed offer (bid) to

reflect that the previously displayed

offer (bid) is no longer available.

* * *Interpretations and Policies

.01 With respect to subsection (a) of

this Rule, if the disseminated bid (offer)

is on behalf of an order represented by

a Floor Broker, DPM, or OBO and is for

less than the firm quote requirement

applicable for that class of options, the

trading crowd is obligated to buy or sell

the necessary number of contracts

needed to make the disseminated quote

firm for the firm quote requirement for

that class of options.

.02–.08 No change.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and the

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange 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

Exchange 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

a. Background. The Exchange recently

filed a proposed rule change that

provides that, under certain

circumstances, an order that is routed to

the Exchange’s Retail Automatic

Execution System (‘‘RAES’’) may be

executed at more than one price.3

Specifically, the Exchange proposed

that RAES orders utilizing the

Exchange’s Automated Book Priority

(‘‘ABP’’) system are executed against the

book price up to the applicable book

volume or a larger amount as predetermined by the appropriate Floor

Procedure Committee (‘‘FPC’’) for the

subject option class.4 The balance

would be (i) routed to the Public Access

Routing terminal (‘‘PAR’’) if Autoquote

is not in effect for that series; (ii)

assigned to participating market-makers

at the Autoquote price if Autoquote

constitutes the new best bid or offer; or

(iii) executed against an order in the

book if such order constitutes the new

best bid or offer with the balance of the

RAES order being assigned to

participating market-makers at the new

book price up to the Book Price

Commitment Quantity.

b. Proposed Change. RAES essentially

provides an automated version of the

firm quote process and the same logic

which suggests there should be split

price executions on RAES in certain

circumstances applies equally to the

firm quote process for orders

represented in open outcry.

Consequently, the Exchange is now

proposing to make a similar change to

the Firm Quote Rule.

Specifically, in those instances where

the Exchange’s book constitutes the

prevailing market bid (offer) and a

marketable sell (buy) order is

represented in open outcry, the

represented order would be executed at

the book price in an amount equal to the

amount of the booked order establishing

the best bid (offer). However, in the

event the order in the book is for a

smaller number of contracts than the

represented order, the balance of the

represented order must be executed at

no worse than the same price at which

the initial portion of the order was

executed up to an amount prescribed by

the appropriate Market Performance

Committee on a class-by-class basis (the

‘‘Book Price Commitment Quantity’’).

Any portion of the order remaining to be

executed after the trading crowd has

executed the Book Price Commitment

Quantity at the disseminated best bid or

offer will be required to be executed at

least at (i) the price of any other order(s)

in the book that then equals or

represents the prevailing market bid or

offer for the quantity of such order; or

(ii) the market-maker disseminated

price 5 if that price represents the

prevailing market bid or offer (after the

booked order(s) has been traded) for the

entire remainder of the order. So long as

an order in the book equals or

represents the next prevailing market

bid or offer, any remaining balance of

the order will be handled in accordance

with (i) or (ii) of this paragraph, in such

order.

The following example illustrates the

application of the proposed rule: The

Book Price Commitment Quantity is set

at 10 contracts; there ae two sell orders

resident in the book priced a 29⁄16 and

25⁄8 respectively—the first is for one

contract and the second is for 5

contracts; the crowd’s Autoquote market

is 21⁄2–23⁄4; and the best bid/offer on the

Exchange is 21⁄2–29⁄16 (assume no other

market center has a better bid/offer); A

market order to buy 50 contracts is

represented in the trading crowd. The

crowd’s obligation with respect to this

order would be as follows:

• Ten contracts must be executed at

no worse than 29⁄16;

• The new best bid/offer is 21⁄2–25⁄8;

• Ten contracts must be executed at

no worse than 25⁄8;

• The new best bid/offer is 21⁄2–23⁄4;

• The remaining 30 contracts must be

executed at no worse than 33⁄4.

c. Book Indicator. When the best bid

or offer on the Exchange’s book

constitutes the best bid or offer on the

Exchange (i.e., it is establishing the best

bid or offer and not merely matching the

market-maker bid or offer) 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.’’

2. Statutory Basis

The Exchange believes the proposed

rule change is consistent with Section

6(b) of the Act 6 in general, and in

particular, with Section 6(b)(5) of the

Act,7 in that it is designed to promote

just and equitable principles of trade,

prevent fraudulent and manipulative

acts and practices.

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.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants or Others

The Exchange has neither solicited

nor received written comments on the

proposed rule change.

1708 Federal Register / Vol. 66, No. 6 / Tuesday, January 9, 2001 / Notices

8 17 CFR 200.30–3(A)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 43530

(November 7, 2000), 65 FR 69355.

4 In approving this rule, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

5 15 U.S.C. 78f(b).

6 15 U.S.C. 78f(b)(5).

7 15 U.S.C. 78s(b)(2).

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

publishers 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 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

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–00–41 and should be

submitted by January 30, 2001.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–540 Filed 1–8–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43787; File No. SR–CHX–

00–28]

Self-Regulatory Organizations; The

Chicago Stock Exchange, Inc.; Order

Granting Approval to Proposed Rule

Change Relating to Automatic

Execution of Agency Limit Orders for

Dual Trading System Issues

January 2, 2001.

I. Introduction

On September 14, 2000, the Chicago

Stock Exchange, Inc. (‘‘CHX’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change

relating to automatic execution of

agency limit orders for dual trading

system issues. The proposed rule

change was published for comment in

the Federal Register on November 16,

2000.3 The Commission received no

comments on the proposal. This order

approves the proposed rule change.

II. Description of the Proposal

The Exchange proposes to amend

CHX Rule 37(b)(6) under Article XX

relating to the automatic execution of

agency limit orders for dual trading

system issues in the event of a tradethrough. Under the proposal, a

specialist would be allowed to elect, on

an issue-by-issue basis, to either

manually or automatically execute limit

orders when a trade-through occurs in

the primary market. The current rule

provides that agency limit orders (that

are not marketable when entered into

the Exchange’s MAX automatic

execution system) will automatically be

filled at the limit price when there is a

price penetration of the limit price in

the primary market for the subject

security or securities. Under the

proposal, automatic execution of such

limit orders will no longer be required.

A CHX specialist may elect to provide

for automatic execution of agency limit

orders at the limit price when there is

a price penetration of the limit price in

the primary market for the subject

security or securities. The obligation to

fill the order at the limit price remains

the same, whether executed manually or

automatically. The Exchange believes

that the proposed amendment

reasonably anticipates the impact that

the decimal pricing environment will

have on the national market system,

where the number of small orders

executed at multiple price levels may

increase the number of inadvertent

trade-throughs that could otherwise lead

to unwarranted automatic executions of

large orders in a CHX specialist’s limit

order book, exposing the specialist to

increased liability in a decimal pricing

environment.

III. Discussion

The Commission has reviewed

carefully the CHX’s proposed rule

change and finds, for the reasons set

forth below, that the proposal is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange,4 and with the

requirements of Section 6(b).5 In

particular, the Commission finds the

proposal is consistent with Section

6(b)(5) 6 in that it is designed to promote

just and equitable principles of trade, to

remove impediments and to perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest. The Commission

believes the proposal is reasonably

designed to guard against the possible

situation where the number of small

orders executed on the Exchange at

multiple price levels increases the

number of inadvertent trade-throughs

that could otherwise lead to

unwarranted automatic executions of

large orders in a specialist’s limit order

book, resulting in increased liability to

CHX specialists. The Commission

believes the proposal is designed to

provide a safeguard as the national

market system converts to a decimal

pricing environment, and should result

in grater stability during the transition.

Furthermore, the Commission finds that

the proposal is consistent with the

section 6(b)(5) requirement that the

Exchange’s rules be designed to promote

just and equitable principles of trade,

because the obligation to fill orders at

the limit price remains constant,

regardless of whether executions are

manual or automatic.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,7 that the