[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26058-26059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12002]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35695; File No. SR-CBOE-95-06]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated, Relating to
the CBOE Retail Automatic Execution System
May 9, 1995.
I. Introduction
On January 18, 1995, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed a proposed rule change
with the Securities and Exchange Commission (``SEC'' or
``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ to
modify the operation of the CBOE's Retail Automatic Execution System
(``RAES''). The proposed rule change would grant senior staff in the
Exchange's Control Room the authority to turn off RAES in the event of
a system malfunction that affects the Exchange's ability to disseminate
or update market quotes.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposal was published for comment and appeared in
the Federal Register on February 23,1995.\3\ No comment letters were
received on the proposed rule change. This order approves the
Exchange's proposal.
\3\ See Securities Exchange Act Release No. 35388 (February 16,
1995), 60 FR 10134 (February 23, 1995).
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II. Description of the Proposal
CBOE proposes to grant the Exchange's Control Room the authority to
turn off RAES \4\ if there is a system malfunction that affects the
Exchange's ability to disseminate or update market quotes.
Specifically, the proposal would add Interpretation .01 to CBOE Rule
24.15, and Interpretation .03 to Rule 6.8 to grant the senior person
then in charge of the Exchange's Control Room the authority to turn off
RAES if there is a system malfunction that affects the Exchange's
ability to disseminate or update market quotes. The proposed language
for both Interpretation .01 to Rule 24.15, and Interpretation .03 to
Rule 6.8 is identical.
\4\ RAES automatically executes public customer market and
marketable orders of a certain size against participating market
makers in the CBOE trading crowd at the best bid or offer reflected
in the CBOE quotation system. A more detailed description of RAES is
provided in Securities Exchange Act Release No. 22015 (May 6, 1985),
50 FR 19832 (May 10, 1985).
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When an order is entered on RAES, the system automatically attaches
to the order an execution price, determined by the prevailing market
quote at the time [[Page 26059]] of the order's entry into the system.
A buy order will pay the prevailing market quote for an offer and a
sell order will sell at the prevailing market quote for the bid. A
market maker who has signed on as a participant in RAES will be
designated as a contra-broker on the trade; trades are assigned to
participating market makers on a rotating basis.
By agreeing to participate in RAES, a market maker is automatically
assigned trades based on the prevailing market quote that is then being
disseminated. Consequently, it is important that the prevailing market
quote be accurate, because otherwise market makers participating in
RAES may be assigned trades at prices other than the actual prevailing
market quote. In addition, in the event that incorrect quotes are
displayed because of a quote dissemination problem, a customer's order
could be filled at a price other than the quote the customer sees on
display.
CBOE believes that the proposed interpretations to Rules 24.15 and
6.8 are necessary to prevent market makers from being assigned trades
based on inaccurate or ``stale'' market quotes that are the result of a
system malfunction, and to prevent customer orders from being filled
based on such inaccurate or ``stale'' market quotes. CBOE also believes
that the proposed interpretations are necessary to prevent filling
customers' orders at prices different from the prices displayed.
The proposed rule change seeks to address these occurrences by
vesting the senior person then in charge of the Exchange's Control Room
with the authority to act quickly to turn off RAES if there is a system
malfunction that affects the Exchange's ability to disseminate or
update market quotes.\5\ Because RAES trades are based on the current
disseminated quote, RAES trades would be based on inaccurate or
``stale'' quotes during a system malfunction that interferes with
dissemination of current quote information. The Exchange believes it is
important for staff persons in the Control Room to have the authority
to turn off RAES because the Control Room will most likely learn of the
system malfunction before Floor Officials or other Exchange staff.
Consequently, Control Room staff can act in a timely manner to prevent
trades based on ``stale'' market quotes.
\5\ The CBOE represents that examples of ``systems
malfunctions'' include: outages of the Exchange's autoquote system;
communications disruptions between the Exchange and the processor
for the Options Price Reporting Authority; and the unavailability of
market data from the underlying market due to systems malfunctions
in that market or in the communications between that market and
CBOE. See Letter from Michael Meyer, Attorney, Schiff, Hardin and
Waite, to John Ayanian, Attorney, Office of Market Supervision
(``OMS''), Division of Market Regulation (``Market Regulation''),
Commission, dated February 17, 1995.
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If RAES is turned off because of the circumstances described above,
the Control Room will disseminate a floor-wide announcement that RAES
has been turned off,\6\ and the orders that would have been routed to
RAES will be automatically rerouted to the floor broker printer in the
trading crowd or to the appropriate member firm booth. Where the order
is re-routed will depend upon parameters set by member firms for their
customers' orders prior to entering the orders onto RAES.\7\ If the
order is not re-routed to the member firm booth, the order will be
automatically re-routed to the designated floor broker printer, where
the floor broker assigned to that printer will promptly execute the
order.\8\
\6\ The Control Room immediately notifies the floor that RAES
has been turned off by (1) transmitting a message to the book staff,
floor broker, and member firm booth printers; (2) announcing it via
the public address system; (3) posting it on the electronic
administrative message board located in the pits; and (4) posting it
on the CBOE bulletin board, which is available from any Exchange
terminal. Telephone conversation between Tim Watkins, Market
Operations Department, CBOE, and John Ayanian, Attorney, OMS, Market
Regulation, Commission, on April 19, 1995.
\7\ According to CBOE, when determining order parameters for
routing purposes, the member firms look to (1) the size of the
order, (2) whether the series is on RAES, and (3) whether it is a
market order or an immediately executable limit order. Telephone
conversation between Edward Joyce, CBOE, Michael Meyer, Attorney,
Schiff, Hardin and Waite, Michael Walinskas, Branch Chief, OMS,
Market Regulation, Commission, and John Ayanian, Attorney, OMS,
Market Regulation, Commission, on February 13, 1995.
\8\ Telephone conversation between Barbara Casey, Market
Regulation Department, CBOE, and John Ayanian, Attorney, OMS, Market
Regulation, Commission, on April 18, 1995.
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Pursuant to the proposed interpretations, once the system
malfunction has been corrected and the market quotes have been updated,
either the senior person then in charge of the Exchange's Control Room,
or the Order Book Official, or the RAES Supervisor may re-start RAES.
III. Commission Finding and Conclusions
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) of the Act.\9\
Specifically, the Commission finds that the proposed rule change
provides a reasonable mechanism for the CBOE to respond to system
malfunctions that impact the integrity of the RAES system.
\9\ 15 U.S.C. 78f(b)(5).
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The Commission notes that this proposal only authorizes the senior
person in the Control Room to turn off RAES in circumstances that
involve technical system malfunctions affecting the accuracy of the
CBOE's automated pricing system. While the Commission understands that
it is impractical to enumerate every possible system malfunction that
may affect the accuracy of market quotations, it notes, nonetheless,
that not all ``stale'' or inaccurate market quotations are the result
of system malfunctions, and that this proposal does not grant senior
persons in the Control Room the authority to turn off RAES in these
other circumstances.
Finally, the Commission believes that CBOE's alternative routing
procedures, as proposed for RAES orders in the event of a system
malfunction, should provide small investors an efficient and effective
method for order execution in circumstances where RAES is turned off
pursuant to this rule change.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-CBOE-95-06), is
approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12002 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M
