[Federal Register Volume 64, Number 205 (Monday, October 25, 1999)]
[Notices]
[Pages 57502-57504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27716]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42012; File No. SR-CBOE-99-56]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Inc. Relating to the Operation of the Retail Automatic
Execution System
October 15, 1999.
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 October 6, 1999, the Chicago Board Options Exchange Inc. (``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.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to adopt a new policy concerning the
administration of its rules governing the operation of its Retail
Automatic Execution System (``RAES''). The new policy concerns the
handling of orders on RAES in cases where the CBOE's best bid or offer
is inferior to the best bid or offer in another market. The policy will
be reflected in new Interpretation .08 to rule 6.8. 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.
[[Page 57503]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Interpretation .02 to CBOE Rule 6.8 governs the handling of orders
for multiply-traded options on RAES in cases where the CBOE's best bid
or offer is inferior to the current best bid or offer in any other
market. When RAES receives an order for a multiply-traded option at a
time when a better bid or offer for that option (the National Best Bid
or Offer, or ``NBBO'') is displayed on another exchange, the order will
either be rejected for manual handling (so that the order is not
automatically executed at an inferior price to the NBBO), or the order
will be executed at the NBBO if the NBBO is better than the CBOE bid or
offer by no more than the designated number of minimum trading
variations (``step-up amount''). Pursuant to Interpretation .02 to rule
6.8, the appropriate Floor Procedure Committee (``FPC'') determines
which option classes will be entitled to be executed automatically at
the better bid or offer and also determines the step-up amount at which
the order still will be executed automatically on RAES.\3\ In
situations where the NBBO is better than the CBOE bid or offer by more
than the number of ticks represented by the designated step-up amount,
the order will be rerouted for manual handling.
---------------------------------------------------------------------------
\3\ In this regard, the Commission recently approved an
amendment to Interpretation .02 that authorizes the appropriate FPC
to establish a step-up amount greater than the one-tick increment
established pursuant to CBOE rule 6.42. See Securities Exchange Act
Release No. 41821 (September 1, 1999), 64 FR 50313 (September 16,
1999) (SR-CBOE-99-17).
---------------------------------------------------------------------------
The application of a step-up amount (pursuant to Interpretation .02
to rule 6.8), particularly a step-up amount two ``ticks'' or more,
could result in a crossed market on the Exchange (i.e., a market where
a stepped-up bid would be higher than the best offer, or a stepped-down
offer would be lower than the best bid). The Exchange believes that it
is inconsistent with a fair and orderly market for an automatic step-up
to result in a crossed market. Moreover, by forcing market makers to
buy options contracts at higher prices than they can sell those
contracts, a crossed market subjects market makers to potentially
significant losses.\4\ The proposed new policy will prevent these
occurrences as further described below.
---------------------------------------------------------------------------
\4\ Telephone conversation between Timothy Thompson, Director,
Regulatory Affairs, CBOE and Gordon Fuller, Special Counsel,
Division of Market Regulation, SEC (October 6, 1999).
---------------------------------------------------------------------------
Under proposed new Interpretation .08 to Rule 6.8, orders will not
be automatically executed on RAES at stepped-up prices in situations
where, after applying the step-up amount, there would be a crossed
market on the Exchange. Any orders prevented from being automatically
executed by operation of this policy will be rerouted to the Public
Automated Routing (``PAR'') machine of the Designated Primary Market
Maker (``DPM'') for manual handling.\5\ Upon receipt of that order, in
accordance with CBOE Rule 6.73, the floor broker or DPM will be
obligated to use due diligence in the handling of the order to execute
the order at the best price or prices available to him.
---------------------------------------------------------------------------
\5\ The PAR screen is a dynamic touch-screen terminal designed
to allow electronic representation of crowd-routed orders. The PAR
screen enables a broker to trade, cancel, print or electronically
book an order or bundle of orders. When the order is filled or
canceled, the execution or cancel report is sent from the trading
pit to the branch. Telephone conversation between Timothy Thompson,
Director, Regulatory Affairs, CBOE and Gordon Fuller, Special
Counsel, Division of Market Regulation, SEC (October 12, 1999).
---------------------------------------------------------------------------
In addition, pursuant to the Exchange's firm quote rule, Rule 8.51,
any order that is rerouted will be entitled to be executed at the
Exchange's displayed bid or offer when that order is represented in
trading crowd. Of course, depending on the circumstances, that order
may be filed at a price better than the DBOE's displayed bid or offer.
By preventing the automatic execution of orders at prices that
reflect crossed markets on the Exchange, the Exchange represents that
the proposed policy is consistent with and in furtherance of the
objectives of Section 6(b)(5) of the Act to promote just and equitable
principles of trade and to remove impediments to the perfect the
mechanism of a free and open market.
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participant 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 foregoing rule change has become immediately effective pursuant
to Section 19(b)(3)(A) and Rule 19b-4(f)(6) under the Act because:
(i) It does not significantly affect the protection of investors
or the public interest;
(ii) It does not impose any significant burden on competition;
and
(iii) By its terms, it does not become operative for 30 days
after the date of the filing, or such shorter time as the Commission
may designate if consistent with the protection of investors and the
public interest; provided that the self-regulatory organization has
given the Commission written notice of its intent to file the
proposed rule change, along with a brief description and text of the
proposed rule change, at least five business days prior to the date
of filing of the proposed rule change, or such shorter time as
designated by the Commission.
In this regard the CBOE has agreed that the proposal need not become
operative for 30 days, but has requested that the operative date be
accelerated. In addition, the CBOE provided the Commission with written
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 filing of the proposed rule change.
The Commission finds that it is appropriate to designate the
proposal to become operative today because such designation is
consistent with the protection of investors and the public interest.
Specifically, the Commission finds that it is appropriate to accelerate
the operative date of the proposed rule change because the proposal
will allow the CBOE to provide the benefits of a larger ``step-up
amount'' for a greater number of customers, promoting prompt executions
of these customer order at the NBBO. In addition, the proposal is
similar to a rule of the Pacific Exchange, Inc. (``PCX'') that was
approved by the Commission in September 1998.\6\ For these reasons the
Commission finds that designation of the proposal to become operative
today is consistent with the protection of investors and the public
interest.\7\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 40412 (September 8,
1998), 63 FR 49626 (September 16, 1998) (SR-PCX-98-27).
\7\ In reviewing this proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation consistent with Section 3(f) of the Act, 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission requests, however, that the CBOE provide it with
information regarding the occasions in which the new Interpretation is
applied and the promptness of the manual execution of orders that are
prevented from automatic execution by operation of the new
Interpretation. This data should cover, at a minimum, the period
commencing as of the proposed Interpretation's operative date and
concluding six months thereafter.
[[Page 57504]]
At any time within 60 days of the filing of such 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 purposes of the Act.
VI. Solicitation of Commission
Interested persons are invited to submit 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, 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
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-99-56 and should
be submitted by November 15, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27716 Filed 10-22-99; 8:45 am]
BILLING CODE 8010-01-M
