01-7073. Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Extending the Pilot Program for Rule 6.8(c) Regarding Operation of the Retail Automatic ...

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 16, 2001, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed a proposed rule change with the Securities and Exchange Commission (“SEC” or “Commission”). The proposed rule change is described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as a “non-controversial” rule change under paragraph (f)(6) of Rule 19b-4,^[3] which renders the proposed rule change effective upon receipt of this filing by the Commission. 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 hereby proposes to amend CBOE Rule 6.8(c) in order to extend, for an additional six-month period until August 21, 2001, the pilot program (“Pilot”) that currently provides for certain orders to be rejected from the CBOE's retail Automatic Execution System (“RAES”) ^[4] for manual handling in certain limited situations.^[5] The text of the proposed rule change is available at the CBOE and the Commission.

Self-Regulatory Organization's Statement of the Purpose of, and 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

The Commission approved the Pilot on November 22, 1999.^[6] The Pilot amends CBOE Rule 6.8, which governs the operation of RAES, to provide for certain orders to be rejected from RAES for manual handling in the limited situation where the bid or offer for a series of options generated by the Exchange's Autoquote system (or any Exchange approved proprietary quote system) becomes crossed or locked with the best bid or offer for that series as established by a booked order. On April 3, 2000, the Commission approved an extension of the Pilot until August 21, 2000.^[7] On October 17, 2000, the Commission approved another extension of the Pilot until February 21, 2001.^[8]

In addition, during the six-month period covered by the first extension of the Pilot,^[9] the Exchange filed two proposed rule changes to implement systems changes developed by the Exchange. The CBOE represents that the systems changes it proposed are designed to virtually eliminate the need for certain orders to be rejected from RAES in the situations currently covered by the Pilot (“Certain RAES Kick-Outs”). The first proposal,^[10] which has been approved by the Commission,^[11] involves an enhancement to the Exchange's Automated Book priority system (“ABP”). The Enhancement is called ABP Split Price. The second proposal, which is pending, seeks approval for an enhancement to the Exchange's electronic limit order book (“EBook”). That proposed enhancement is called Autoquote Triggered EBook Execution (“Trigger”).^[12]

The Exchange now seeks approval to extend the Pilot for an additional six months. The Exchange represents that implementation of Trigger (if approved by the Commission) and ABP Split Price (which has been approved by the Commission) would virtually eliminate, but not obviate, Certain RAES Kick-Outs. The Exchange is requesting this extension of the Pilot so that procedures currently permitting Certain RAES Kick-outs will remain in effect while the Commission considers the Exchange's Trigger proposal and during Commission review of any forthcoming Exchange proposal seeking permanent approval of those RAES kick-out procedures.^[13]

2. Statutory Basis

The Exchange represents that the proposed rule change is consistent with and furthers the objectives of Section 6(b)(5) ^[14] of the Act in that it is designed to remove impediments to a free and open market and to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The CBOE does not believe that the proposed rule change will impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement 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

The foregoing rule change has become effective upon filing pursuant to section 19(b)(3)(A)(iii) of the Act ^[15] and Rule 19b-4(f)(6) thereunder ^[16] because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which the proposed rule change was filed, or such shorter time as the Commission may designate. At any time within 60 days of the filing of such proposal, 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.

Proposed rule changes filed with the Commission pursuant to Rule 19b-4(f)(6) of the Act do 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.” ^[17] The CBOE has requested that the Commission waive the 30-day delay in the operative date of the proposed rule change.^[18] The Commission finds that it is consistent with the protection of investors and the public interest to waive the 30-day delay in the operative date of the proposed rule change because the proposal simply extends the previously approved Pilot.^[19]

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 the File No. SR-CBOE-01-05 and should be submitted by April 12, 2001.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority. ^[20]

Jonathan G. Katz,

Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  17 CFR 240.19b-4(f)(6).

4.  RAES is the Exchange's automatic execution system for public customer market or marketable limit orders of less than a certain size.

5.  The current Pilot expired on February 21, 2000. See discussion below, Section II.A.1.

6.  Securities Exchange Act Release No. 42168 (November 22, 1999), 64 FR 66952 (November 30, 1999).

7.  Securities Exchange Act Release No. 42615 (April 3, 2000), 65 FR 19401 (April 11, 2000) (“First Extension Notice”).

8.  Securities Exchange Act Release No. 43448 (October 17, 2000), 65 FR 63272 (October 23, 2000).

9.  See First Extension Notice.

10.  Securities Exchange Act Release No. 43430 (October 11, 2000), 65 FR 62776 (October 19, 2000) (notice of proposed rule change).

11.  Securities Exchange Act Release No. 43932 (February 6, 2001), 66 FR 10332 (February 14, 2001).

12.  SR-CBOE-00-22. The Exchange represents that Trigger, if approved and implemented as currently proposed, would allow certain booked orders to be automatically executed up to applicable RAES contract limits, but only where an Autoquote-generated bid has become crossed or locked with the Exchange's best bid or offer as established by a booked order. According to the Exchange, implementation of Trigger would eliminate the majority of RAES kick-outs that ensure when firms submit orders seeking to take advantage of pricing anomalies.

13.  The Exchange intends to file a proposed rule change seeking permanent approval of the procedures that currently permit Certain RAES Kick-Outs.

14.  15 U.S.C. 78s(b)(5).

15.  15 U.S.C. 78s(b)(3)(A).

16.  17 CFR 240.19b-4(f)(6).

17.  17 CFR 240.19b-4(f)(6)(iii).

18.  Telephone conversation between Angelo Evangelou, Attorney, CBOE, and Gordon Fuller, Counsel to the Assistant Director, Division of Market Regulation, Commission (February 26, 2001).

19.  For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

20.  17 CFR 200.30-3(a)(12).