[Federal Register Volume 64, Number 229 (Tuesday, November 30, 1999)]
[Notices]
[Pages 66954-66956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31028]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42167; File No. SR-CBOE-99-57]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendment No. 1 by the
Chicago Board Options Exchange, Inc. Governing the Operation of Its
Retail Automatic Execution System
November 22, 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 14, 1999, 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.
Additionally, on November 15, 1999, the Exchange filed with the
Commission Amendment No. 1 to the proposal.\3\ 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.
\3\ See Letter from Timothy Thompson, Director of Regulatory
Affairs, CBOE, to Gordon Fuller, Special Counsel, Division of Market
Regulation, SEC, dated November 15, 1999. The Amendment clarifies
the wording of the proposed rule change. Because of the substantive
nature of the amendment, the Commission deems the filing date of the
proposed rule change to be November 15, 1999.
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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''). 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.
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 permit the
appropriate Floor Procedure Committee (``FPC'') to designate that RAES
orders for a particular option series will default for manual
representation in the trading crowd in situations where the National
Best Bid or Offer (``NBBO'') for that particular series of that class
is crossed (e.g., 6\1/8\ bid, 6 asked) or locked (e.g., 6 bid, 6
asked). The proposed rule will provide market-makers participating on
RAES protection from having to fill orders at crossed or locked prices
since the NBBO can become crossed or locked as a result of one market
disseminating inaccurate or delayed quotes.
Currently, under CBOE Rule 6.8(a)(ii), when RAES receives an order,
the system automatically will attach to the order its execution price,
determined by the prevailing market quote at the time of the order's
entry into the system, except as otherwise provided in Interpretation
.02 of CBOE Rule 6.8 in respect of multiply-traded options. A buy order
will pay the offer; a sell order will sell at the bid.
Pursuant to Interpretation .02, when RAES receives an order for a
multiply-traded option at a time when a better bid or offer for that
option 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
(``ticks''). The appropriate FPC determines which option classes will
be entitled to be executed automatically at the better bid or offer and
also determines the number of ticks better than the CBOE bid or offer
that the NBBO may be and at which the order still will be executed
automatically on RAES.\4\ In situations where the NBBO for a particular
series is more than the designated number of ticks better than the CBOE
bid or offer, the order for that multiply-traded class will be rerouted
for manual handling.\5\
[[Page 66955]]
In addition, pursuant to the Exchange's firm quote rule, CBOE 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 the
trading crowd. Depending on the circumstances, that order may be filled
at a price better than the CBOE's displayed bid or offer.
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\4\ See Securities Exchange Act Release No. 41821 (September 1,
1999), 64 FR 50313 (September 16, 1999), approving SR-CBOE-99-17.
SR-CBOE-99-17 amends Interpretation .02 to authorize the appropriate
FPC to establish a step-up amount greater than the one-tick
increment established under CBOE Rule 6.42.
\5\ 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. 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.
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The proposal adds another situation in which an order for a
multiply-traded class may be rerouted for manual handling. The
authority for determining when these orders will be rejected for manual
handling will be set forth in Interpretation .06 to CBOE Rule 6.8. The
Exchange is proposing to allow the appropriate FPC to designate option
classes that will be rerouted for manual handling in situations in
which the NBBO for a particular series of that class is crossed or
locked. Depending on the circumstances, the appropriate FPC may
determine to have such orders rerouted only when the NBBO is crossed
but not locked.\6\ The appropriate FPC may also determine to have
orders be rejected only when the CBOE's market becomes crossed or
locked as a result of the step-up amount having been applied to a
particular options series. Also, the FPC may determine to allow for
automatic executions of the orders notwithstanding that the NBBO is
crossed or locked (assuming no other reason for the order to be
rerouted exists) if the circumstances warrant such action to maintain a
fair and orderly market.
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\6\ The Commission recently published an order declaring
immediately effective CBOE's proposal to adopt new Interpretation
.08 to Rule 6.8. New Interpretation .08 requires a RAES order to be
rerouted for representation in the trading crowd when the CBOE
market becomes crossed as a result of quotes ``stepping-up'' to
match the NBBO. See Securities Exchange Act Release No. 42012
(October 15, 1999), 64 FR 57502 (October 25, 1999). The current
filing will supersede that filing because it will provide the
appropriate FPC with the discretion to have orders rejected from
RAES when the CBOE market is not only crossed as a result of quotes
``stepping-up'' to match the NBBO, but also when it becomes locked
as a result of application of the ``step-up'' Interpretation.
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The proposed rule would allow for the rerouting of RAES orders of a
particular class notwithstanding that the orders of that particular
class may not have been designated to automatically step up to the NBBO
and notwithstanding that the NBBO may be more ticks away from the CBOE
market than the designated step-up amount. Nonetheless, the CBOE
believes that market makers are at risk for filling orders
automatically in situations in which the NBBO is crossed or locked even
if they are not stepping up to the NBBO on RAES because the fact that
the NBBO is crossed or locked may be an indication that the prices are
inaccurate. The NBBO may become crossed or locked because of
communications or systems problems, or due to keystroke errors, or
quotation dissemination delays. The proposal will allow the floor
broker or DPM to determine if the locked or crossed market is actually
a true market.
2. Statutory Basis
The CBOE believes that this proposal will enhance its ability to
provide instantaneous, automatic execution of public customers' orders
at the best available prices. This furthers the objectives of Section
6(b) of the Act \7\ in general and furthers the objectives of Section
6(b)(5) \8\ in particular by promoting just and equitable principles of
trade, removing impediments to and perfecting the mechanism of a free
and open market and national market system, and protecting investors
and the public interest.
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\7\ 15 U.S.C. 78f(b).
\8\ 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.
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
Amendment No. 1 and Timing for Commission Action
The proposed rule filing has been filed by the Exchange pursuant to
Section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) of Rule 19b-
4 thereunder.\10\ The proposed rule change: (i) Does not significantly
affect the protection of investors or the public interest; (ii) does
not impose any significant burden on competition; and (iii) does not
become operative until thirty days after the date of filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest, provided that the
Exchange 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.
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6).
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The Exchange has requested that the Commission accelerate the
operative date of the proposal. In addition, the Exchange 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 the filing
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 it will limit
market-maker risk in situations where the NBBO becomes locked or
crossed, by removing the requirement that market-makers execute
transactions at prices that may not accurately reflect true market
prices at the time the trade is initiated. 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.
The Commission requests, however, that the CBOE provide it with
information regarding the occasions in which the Interpretation is
applied and the promptness of the manual execution of orders that are
prevented from automatic execution by operation of the Interpretation.
This data should cover, at a minimum, the period commencing as of the
proposed Interpretation's operative date and concluding six months
thereafter.
At any time within 60 days of the filing of this rule change, the
Commission may summarily abrogate the 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.\11\
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\11\ In reviewing this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing,
[[Page 66956]]
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 CBOE. All submissions
should refer to File Number SR-CBOE-99-57 and should be submitted by
December 21, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-31028 Filed 11-29-99; 8:45 am]
BILLING CODE 8010-01-M
