[Federal Register Volume 63, Number 98 (Thursday, May 21, 1998)]
[Notices]
[Pages 28019-28020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13501]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39992; File No. SR-CBOE-98-13]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Board Options
Exchange, Inc. Relating to the Automatic Execution of Small Retail
Orders in Equity Options
May 14, 1998
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, notice is hereby given that on April 6, 1998, 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. On May 13, 1998, the CBOE
submitted to the Commission Amendment No. 1 to the proposed rule
change.\2\ 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\ In Amendment No. 1, the Exchange clarifies the operation of
the proposed rule change. More specifically, the Amendment explains
the process of designating options to which the proposed automatic
execution feature applies as well as reasons for suspending the new
feature. See Letter from Timothy Thompson, Director, Regulatory
Affairs, Legal Department, CBOE, to Ken Rosen, Attorney, Division of
Market Regulation, Commission, dated May 11, 1998 (``Amendment No.
1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes amend CBOE Rule 6.8 and Interpretation and Policy
.02 thereunder to provide added flexibility to the Exchange's Retail
Automatic Execution System (``RAES'') where the best bid or offer on
the Exchange for a given equity option is inferior to the best bid or
offer for the same option in another market where the option is traded.
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. 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
The purpose of the proposed rule change is to provide for the
automatic execution on RAES of eligible retail orders to buy or sell
equity options at a price that may be one tick better than the best
price currently quoted on the Exchange if the better price is then
being quoted in another market where the same options are traded. Under
existing CBOE Rule 6.8(a)(ii), the execution price automatically
attached to an equity option order executed in RAES is the prevailing
market quote on CBOE at the time the order is entered into the system.
If at that same time another market is displaying a better quote for
the option, under the existing Rules the order is not automatically
executed, but instead, pursuant to Interpretation and Policy .02 under
CBOE Rule 6.8, is rerouted for non-automated handling. In most cases,
especially where the market away from the CBOE is better by only one
``tick'' (i.e., by one minimum quote interval), the order is usually
manually executed on CBOE at the better price.
The proposed rule change will automate the process of filing equity
option orders through RAES at any better price being quoted in another
market, so long as the price is better by no more than one tick. If the
market away from the CBOE purports to be better than the CBOE's quoted
market by more than one tick, the existing procedure will continue to
apply whereby the order is rerouted out of RAES to the Designated
Primary Market Maker or Order Book Official for non-automated handling.
By automating the execution of eligible retail orders for equity
options in the manner described above (referred to as ``RAES Auto-Step-
Up''), investors will be assured the prompt, automatic execution of
these orders at the best available prices, even if those prices are
being quoted in a market by more than one tick. This proposal should
minimize the delay inherent in manually handling orders in this
circumstance, and thereby reduce the risk to investors that, as a
result of an adverse move in the market while their orders are being
manually handled, they may receive an inferior execution.
The Exchange continues to believe that manual handling is called
for where prices apparently quoted in other markets are more than one
tick better than the Exchange's best quotes, because the quotes in
other markets may be displayed in error or may otherwise not be likely
to be available, and because even if Exchange market makers determine
to provide an execution at such better prices, this decision should be
made on a case-by-case basis by the market makers rather than
automatically. In addition, the proposed rule change authorizes the
Chairman of the appropriate Floor Procedure Committee or his or her
designee to disable RAES Auto-Step-Up for specified classes or series
of options or in respect of specified markets when such action is
deemed to be warranted by circumstances or conditions applicable to
such options or markets. This authority would be expected to be
exercised in circumstances such as communication or system problems,
fast markets, and similar situations that could make quotes unreliable.
While the Exchange expects that eventually the Floor Procedure
Committees will determine to apply the RAES Auto-Step-Up to all or
nearly all option classes traded on the floor, the proposed rule change
would permit the program to be initiated on a class by class or trading
station by station basis.\3\ To provide for the orderly introduction of
this change to the exchange's RAES procedures and to measure its effect
before expanding it to equity options floor-wide, the Exchange intends
to introduce the change RAES procedure to selected classes of equity
options during an initial evaluation period, and then over time to
expand the changed procedure to cover a larger number of equity options
unless, upon evaluation, such expansion appears not to be warranted.
Members will be given
[[Page 28020]]
advance notice of each class of options to which these revised
procedures apply.
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\3\ See Amendment No. 1.
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By enhancing the ability of eligible retail orders in multiply-
traded options to receive best execution, the Exchange believes the
proposed rule change will promote just and equitable principles of
trade and protect investors and the public interest, in furtherance of
the objectives of Section 6(b)(5) of the Act.
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 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
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.
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
Commissions, 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-98-13 and should
be submitted by June 11, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-13501 Filed 5-20-98; 8:45 am]
BILLING CODE 8010-01-M
