[Federal Register Volume 63, Number 151 (Thursday, August 6, 1998)]
[Notices]
[Pages 42085-42086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20967]
[[Page 42085]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40283; File No. SR-CBOE-98-27]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. and Amendments Nos.
1, 2 and 3 Relating to Enhancements to the Exchange's Order Execution
System
July 30, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 16, 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 June 23, 1998, the CBOE submitted to the
Commission Amendment No. 1 to the proposed rule change.\2\ On July 15,
1998, the CBOE submitted to the Commission Amendment No. 2 to the
proposed rule change.\3\ On July 21, 1998, the CBOE submitted to the
Commission Amendment No. 3 to the proposed rule change.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ In Amendment No. 1, the Exchange changed the proposed rule
language, clarifying when the new provision may be exercised. The
Exchange also further explained how the altered system operates. See
Letter from Timothy H. Thompson, Director, Regulatory Affairs, Legal
Department, CBOE, to Richard Strasser, Assistant Director, Division
of Market Regulation (``Division''), Commission, dated June 23, 1998
(``Amendment No. 1'').
\3\ In Amendment No. 2, the Exchange further detailed the
operation of its computer system and altered the proposed rule
language to clarify the new rule's interaction with CBOE Rule 6.45.
See Letter from Timothy H. Thompson, Director, Regulatory Affairs,
Legal Department, CBOE, to Richard Strasser, Assistant Director,
Division, Commission, dated July 10, 1998 (``Amendment No. 2'').
\4\ In Amendment No. 3, the Exchange further explains the new
rule's interaction with CBOE Rule 6.45. See Letter from Timothy H.
Thompson, Director, Regulatory Affairs, Legal Department, CBOE, to
Richard Strasser, Assistant Director, Division, Commission, dated
July 20, 1998 (``Amendment No. 3'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE is amending its rule governing the execution of orders by
an Order Book Official (``OBO'') or the Designated Primary Market-Maker
(``DPM'') book staff to provide for the electronic execution of certain
orders on the ``live ammo'' screen. This change is being accommodated
by an enhancement to the Exchange's order execution systems.
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
The CBOE is amending one of its rules to allow an OBO or a DPM to
designate orders to be electronically executed against market-makers
standing in the crowd. Currently, an OBO or a DPM, acting in his or her
capacity as an OBO, represents in the trading crowd the orders that
have been placed on the customer limit order book. These orders are
represented individually when they become marketable and are traded
with the market-makers standing in the crowd. The OBO (or DPM) is able
to determine which orders are marketable by reviewing his or her ``live
ammo'' screen, which is an electronic book screen that displays orders
that are market orders or limit orders that improve the market.\5\
However, when the live ammo screen experiences a large influx of orders
it becomes difficult for the OBO (or DPM) to represent and execute
these orders individually in a timely manner and a sizable backlog can
develop. This is particularly true during opening rotations when a
large number of orders can build up on the ``live ammo'' screen.
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\5\ There are generally six ways an order may be routed to the
live ammo screen. First, if a customer submits a cancel/replace
order to the market for an order already held by the book that order
will go to the live ammo screen. Second, if a customer submits a
cancel/replace order to a limit price that betters the same-side
market quote for an order held by the book, that order will go to
the live ammo screen. Third, market orders received through the
Exchange's order shoe and that are manually booked will go to the
live ammo screen. Fourth, limit orders that better the same-side
market quote, that are received through the order shoe, and that are
manually booked will go to the live ammo screen. Fifth, limit orders
that better the same-side market quote and that are routed directly
to the Electronic Book when the routing parameters have been set at
``0'' will go to the live ammo screen. Sixth, marketable limit
orders that are electronically booked from a floor broker's PAR
workstation will go to the live ammo screen. See Amendment No. 2.
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To speed the process of the OBO or DPM executing live ammo orders,
the CBOE is proposing to change its order execution systems to allow
the OBO or DPM to select orders to be executed electronically. The OBO
or DPM may select for electronic execution one order individually or he
or she may, after reviewing the orders on the screen, select all orders
displayed on a live ammo page (currently a page may contain up to
thirteen orders).\6\ Orders selected for electronic execution against a
participating market-maker must meet the same criteria as those for
Retail Automatic Execution System (``RAES'') eligible orders. To be
eligible to be executed on RAES, the order must be a marketable limit
order that is for the number of contracts established by the Equity
Floor Procedure Committee for that options class (or fewer), pursuant
to Rule 6.8(e).\7\ Orders that are not RAES eligible when the page is
selected will remain on the live ammo screen. Any market-maker who is
signed onto RAES at the time the OBO or DPM selects the order or orders
for electronic execution will be eligible to be electronically assigned
as the contra-party on the trade.
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\6\ Amendment No. 1 clarified that, in addition to accepting one
order or a whole page or orders, the system also can accept any
number of orders from the same page at one time. See Amendment No.
1.
\7\ Most option classes have an eligible order size for RAES of
ten contracts. Some have an eligible order size of twenty contracts.
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In Amendment No. 1, the CBOE altered the proposed rule's language,
adding conditions for when the OBO or DPM may route a live ammo order
for electronic execution.\8\ The OBO or DPM may do so when he or she
believes there are unusual market conditions or when there is a large
influx of orders to the live ammo screen. Moreover, the OBO or DPM must
consult with the crowd before routing a live ammo order or orders for
electronic execution.
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\8\ See Amendment No. 1.
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In Amendment No. 2, the CBOE added language to the proposed rule
change, explaining that the rule would operate notwithstanding the
priority provisions of paragraphs (a) and (b) of CBOE Rule 6.45.\9\
CBOE Rule 6.45 gives priority to some bids and offers, because they
were made earlier in time, over other bids and offers. The Exchange
[[Page 42086]]
explains that it is possible that a RAES-eligible live ammo order may
be executed prior to a non-RAES eligible order received earlier.\10\
The Exchange believes these occurrences will be infrequent for two
reasons. First, the non-RAES-eligible order must be for the same series
as the RAES-eligible order that is traded for there to be an
interruption of the normal priority principles. Second, for the RAES-
eligible order to trade ahead of the non-RAES-eligible order, the limit
price of the non-RAES-eligible order must be at the CBOE's quoted
market because that is the price at which the RAES-eligible order will
be executed. When the limit for the larger non-RAES-eligible order is
at the market, the CBOE book staff will act to execute that order
promptly. Therefore, it is only in those cases where the CBOE book
staff has not had the opportunity to fill those executable non-RAES-
eligible live ammo orders before sending orders for electronic
execution that the RAES-eligible order will be filled before the non-
RAES-eligible order that has time priority. Based on its experience
with how book staffs generally handle their orders, the Exchange
believes that, once the system is in place, the book staff will usually
attempt to fill the larger orders that were first in time before they
send live ammo orders to be electronically executed. Alternatively, one
member of the book staff may seek to execute the larger non-RAES
eligible orders at the same time another member sends the RAES-eligible
live ammo orders to be electronically executed.
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\9\ SeeAmendment No. 2.
\10\ In Amendment No. 3, the Exchange clarified that the time
priority provisions of CBOE Rule 6.45 will continue to govern the
sequence in which RAES-eligible orders are executed using the new
electronic execution feature. See Amendment No. 3.
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Regardless of the possibility that RAES-eligible live ammo orders
may trade ahead of non-RAES-eligible orders, the Exchange believes that
the current proposal is in the best interest of the CBOE marketplace
and public customers. This is because the system will only be employed
when the OBO or DPM believes there to be unusual market conditions or
when there is a large influx of orders to the live ammo screen. In
these situations the employment of this system will allow the book
staff and the crowd to attend to the execution of other business and
will improve the turnaround time of many customer orders. Any non-RAES-
eligible live ammo orders that were not executed before the live ammo
orders were sent to be electronically executed could be executed at
this time assuming they are marketable.
The Exchange also notes that the system will retain book priority.
This means, for example, if the book staff selects a page of live ammo
orders to be electronically executed at the time the CBOE's best bid or
offer on the limit order book equals the prevailing market quote, no
live ammo orders will be executed but those orders will remain on the
live ammo screen. Only after those booked orders have been executed (or
the market changes) will the book staff be able to effectively send the
live ammo orders to be electronically executed.\11\
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\11\ See Amendment No. 2.
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In general, the proposed system change will significantly improve
the turnaround time of customer orders and will allow book staff and
market-makers in the crowd to attend to the transaction of other orders
during busy times. The Exchange also believes this system change will
alleviate the need to declare fast markets in certain situations
because it will allow for the faster execution of orders and will
prevent orders in the live ammo screen from becoming backlogged.
Because the system enhancements to the Exchange's order execution
systems will allow for the OBO or DPM to avoid a backlog of orders on
the live ammo screen and thus to allow market-makers and the book staff
to attend to other business, the Exchange believes this rule change is
consistent with and furthers the objectives of Section 6(b)(5) of the
Act in that it would foster cooperation and coordination with persons
engaged in regulating, clearing, settling, and processing information
with respect to, and facilitating transactions in securities, and would
remove impediments to and perfect the mechanism of a free and open
market in a manner consistent with the protection of 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
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 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, N.W., Washington, D.C. 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
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-98-27 and should
be submitted by August 27, 1998.
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. 98-20967 Filed 8-5-98; 8:45 am]
BILLING CODE 8010-01-M
