[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Notices]
[Pages 72707-72709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33635]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42256; File No. SR-CBOE-99-45]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. to Clarify Certain
Aspects of Interpretation and Policy .02 to Exchange Rule 6.8
December 20, 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 August 19, 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 Exchange. 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
CBOE proposes to amend its Interpretation and Policy .02 to CBOE
Rule 6.8 in order to clarify certain aspects of the Interpretation.
Below is the text of the proposed rule change. Proposed new language is
italicized.
RAES Operations in Equity Options
Rule 6.8 [No change]
* * * Interpretation and Policy
.01 [No change].
.02 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
[[Page 72708]]
have been specifically designated by the appropriate Floor Procedure
Committee 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. In respect of automatic step-up classes of options
under circumstances where the Exchange's best bid or offer is inferior
to the current best bid or offer in another market by more than the
step-up amount, or in respect of specified automatic step-up classes or
series of options or specified markets under circumstances where the
Chairman of the appropriate Floor Procedure Committee or his designee
has determined that automatic step-up should not apply because quotes
in such options or markets are deemed not to be reliable, or in respect
of classes of options other than automatic step-up classes where the
Exchange's best bid or offer is inferior to the current best bid or
offer in another market by any amount, such orders will be rerouted by
the DPM or OBO for that class of options for non-automated handling.
The DPM or OBO will report the execution or non-execution of such
orders to the firm that to originally forwarded the order to RAES. As
used in this Interpretation and Policy .02, the term ``step-up amount''
shall mean the minimum increment for options of that series established
pursuant to Rule 6.42, or any greater amount established by the
appropriate Floor Procedure Committee in respect of specified automatic
step-up classes or series of options. The procedures described in this
Interpretation .02 shall not apply in circumstances where a ``fast
market'' in the options that are the subject of the orders in question
has been declared on the Exchange or where comparable conditions exist
in the other market such that firm quote requirements do not apply.
Under circumstances where the Chairman of the appropriate Floor
Procedure Committee or his designee determines that quotes from one or
more particular markets in one or more classes of options are not
reliable, the Chairman or designee may direct the senior person in
charge of the Exchange's Control Room to exclude the unreliable quotes
from the RAES determination of the NBBO in the particular option
class(es) through the end of that trading day, or until the quotes are
determined to be reliable again whichever occurs first.
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 comment 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
Interpretation and Policy .02 to CBOE Rule 6.8 provides that orders
to buy or sell equity options that are multiply traded in one or more
markets in addition to the CBOE will not be executed on the CBOE's
Retail Automatic Execution System (``RAES'') at prices inferior to the
current best bid or offer in any other market (known as the National
Best Bid or Offer, or ``NBBO''), as the NBBO is identified in RAES.
The proposed rule change makes three clarifications to this
Interpretation: (1) It clarifies that one or more markets may be turned
off from the NBBO calculation while still checking the prices on other
markets; (2) it specifies the individuals vested with authority to make
the determination to exclude a market; and (3) it clarifies the
situation(s) under which such determinations may be made.
Occasionally, bids and offers in certain options from a particular
market may not be reliable, whether due to unusual market conditions,
systems problems, failure by another market's specialist to update
quotes, or other causes. The language of the current Interpretation and
Policy .02 is ambiguous about whether the Exchange has any way to avoid
executing RAES trades at these inaccurate prices except to turn off
NBBO execution altogether for affected option classes.\3\ If the NBBO
execution was thus turned off, public customers receiving executions
through the RAES system would lose the potential benefits of an
execution at the NBBO, even when the inaccurate quotes are only coming
from one particular exchange.
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\3\ While Interpretation .02 currently provides that the
procedures for NBBO executions ``shall not apply'' if a ``fast
market'' has been declared, or if the firm quote requirements do not
apply at the other market, the Interpretation could be read to
require that NBBO be turned off. The Exchange intended for the rule
to have the latter interpretation, and has interpreted the rule as
such.
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The proposed change will clarify the Exchange's current
Interpretation, which allows a market to be excluded individually. It
will make clear that the Exchange can keep filling orders at the best
prices available at any market not experiencing quote reliability
problems by removing the unreliable quotes from the RAES determination
of the NBBO. The unreliable quotes may be excluded from the NBBO
determination until such times as either the quotes become reliable
again, or trading ends for the day--whichever occurs first. This change
will clarify that Exchange public customers may receive RAES execution
of their orders at the best price available at multiple exchanges more
frequently and with less uncertainty.
The proposed change also will vest responsibility and discretion
for determining the reliability of quotes from a particular exchange on
a particular option class with the Chairman of the appropriate Floor
Procedures Committee or his designee--the same procedure that currently
applies under Interpretation and Policy .02 for determining when the
``automatic step-up'' procedure should not apply.\4\
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\4\ See Release No. 34-40096 (June 16, 1998), 63 FR 34209 (June
23, 1998).
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Finally, the proposed change seeks to better describe the
circumstances when a market may be excluded from the NBBO. Currently,
the rule states that the NBBO procedures in the Interpretation shall
not apply when a ``fast market'' has been declared at the Exchange or
another market, or when comparable conditions exist such that the firm
quote requirements do not apply. When the Exchange or another market
declares a ``fast market,'' an indication is sent out alerting the
public to that fact. However, it will not always be known when another
market has taken the step of suspending firm quote requirements in an
option class. The Exchange, by contrast, will often know if there are
problems with quotes in one or more option classes at another market
because the trading crowds at the Exchange continuously monitor the
other markets. Under the proposed Interpretation, if another market's
quotes appear to be unreliable, the trading crowd or Exchange officials
can bring this to the attention of the Chairman of the appropriate
Floor Procedure Committee or his designee, who in turn can arrange
[[Page 72709]]
to contact the other market directly to confirm whether there is a
problem with the quotes.
2. Statutory Basis
CBOE believes that the proposed change in Interpretation and Policy
.02 is consistent with and is furtherance of the provisions of Section
6(b)(5) \5\ of the Act. By making clear that the Exchange has greater
flexibility to keep RAES executing orders at the NBBO, CBOE believes
that public customers will receive better executions of their orders
more frequently. This will improve the efficiency of RAES, thereby
removing impediments to, and perfecting the mechanism of, a free and
open market and a national market system, and thus protecting investors
and the public interest.
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\5\ 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 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
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 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-99-45 and should
be submitted by January 18, 2000.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33635 Filed 12-27-99; 8:45 am]
BILLING CODE 8010-01-M
