[Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
[Notices]
[Pages 47881-47882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22696]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41782; File No. SR-CBOE-99-17]
Self-Regulatory Organizations; Notice of Filing of Amendment #2
and Order Granting Partial Accelerated Approval to a Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to the
Operation of the Retail Automatic Execution System
August 23, 1999.
I. Introduction
On April 16, 1999, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change amending the CBOE's rules
governing the operation of its Retail Automatic Execution System
(``RAES''). On May 21, 1999, the CBOE filed with the Commission
Amendment No. 1 to the proposal.\3\ Today, the CBOE filed Amendment No.
2 to the proposal.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Timothy Thompson, Director, Regulatory
Affairs, CBOE, to Gordon Fuller, Special Counsel, Division of Market
Regulation, SEC, dated May 20, 1999 (``Amendment No. 1'').
\4\ See letter from Christopher R. Hill, Attorney, CBOE, to
Michael Walinskas, Associate Director, Division of Market
Regulation, SEC, dated August 23, 1999 (``Hill Letter'').
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a. The Initial Proposal
The proposal as amended by Amendment No. 1 (``Initial Proposal'')
seeks to increase the maximum order size of certain RAES-eligible
options from 20 to 50 contracts. It also contains provisions relating
to the authority of the CBOE Floor Procedure Committees (``FPCs'') to
change RAES order assignment procedures (including the authority to
implement a procedure called ``Variable RAES,'' described below) and
improve the execution price of RAES orders in multiple listed options
to match a better price on another market. Notice of the Initial
Proposal was published in the Federal Register on June 17, 1999.\5\ The
Commission received no comments on the proposal. The proposal is
pending with the Commission.
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\5\ See Securities Exchange Act Release No. 41501 (June 9,
1999), 64 FR 32568.
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b. The Current Amendment
Amendment No. 2 (``Current Amendment'' or ``Proposed Rule Change'')
will permit the CBOE to immediately implement a new order assignment
procedure called ``Variable RAES'' for CBOE options transactions in
five stocks that are dually listed on both the Philadelphia Stock
Exchange (``Phlx'') and the CBOE. Those stocks are Dell Computer
Corporation (``DLQ''), International Business Machines (``IBM''),
Johnson & Johnson (``NJN''), Coca-Cola (``KO''), and Ford Motor Company
(``F''). The Current Amendment was filed in tandem with a related rule
proposal, SR-CBOE-99-47, which increases the maximum RAES order size
from 20 to 50 contracts in options on those five stocks only. SR-CBOE-
99-47 becomes effective today. The CBOE seeks immediate Commission
approval of the Current Amendment so that Variable RAES can be used
today, when the new order size maximum on the five dually traded
options goes into effect.
II. Description of the Proposal
Under former procedures, RAES orders were randomly assigned to
market makers, and each market maker had to buy or sell the entire
order assigned to him or her. By contrast, Variable RAES as implemented
in the Current Amendment will enable market maker to designate a
maximum number of contracts he or she is willing to buy or sell when a
RAES order for any of the five dually listed options is assigned to
that market maker.\6\ The CBOE represents that, ``[w]ith a higher size
limit for RAES orders, this flexibility to choose their own maximum
participation in any one RAES trade will encourage more market makers
to participate in RAES, since it will give them greater control over
the risks they take by participating in RAES.'' \7\
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\6\ The maximum order size selected by the market maker must be
equal to or greater than a minimum order size set by the FPC. The
FPC will initially set the minimum at 20 contracts per order for
each of the five options covered by the Current Amendment, and may
adjust that level up or down in the future for any of these options.
If the FPC decides to increase the 20-contract minimum in the
future, it will take into account the ability of market makers to
accept the heightened risk associated with that increase. Telephone
conversation between Tim Thompson, Director, Regulatory Affairs,
CBOE, and Christopher R. Hill, Attorney, CBOE, and Gordon Fuller,
Special Counsel, Division of Market Regulation, SEC (August 23,
1999).
\7\ See Hill Letter, supra note 4, at 1.
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III. Discussion
We believe that accelerated approval of Variable RAES for the five
dually listed options is appropriate for three reasons. First, it
allows RAES market makers to choose the level of risk they are
comfortable with. This is important because the CBOE today is
increasing the maximum size of orders eligible for RAES from 20 to 50
contracts in those five dually listed options, thus increasing the
potential exposure of RAES market makers to risk in those options.
Second, the proposal does not otherwise change the way RAES operates
from a customer perspective. Third, the Commission previously published
for comment the Initial Proposal, which included a much more expansive
provision permitting implementation of Variable RAES for all options
classes, not just the five classes at issue here. We received no
comments on the Initial Proposal, and we believe the Current Amendment
does not raise any new issues.
We are not now approving the textual changes to the RAES rules
proposed by the CBOE in its Initial Proposal. Rather, we are continuing
to work with the CBOE to address outstanding issues raised by those
rules relating to the
[[Page 47882]]
manner in which CBOE will be able to employ Variable RAES. Such issues
relate to the degree of authority delegated to the appropriate FPCs
regarding Variable RAES, and to internal governance matters. At a later
time, when we have resolved these outstanding issues, we will also
consider the specific changes to the text of the rules proposed by the
CBOE in its Initial Proposal.
Accordingly, after careful review, the Commission finds that the
Current Amendment is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission finds that the
Current Amendment is consistent with Section 6(b)(5), in that it is
designed ``to promote just and equitable principles of trade * * * to
remove impediments to and perfect the mechanism of a free and open
market * * * and, in general, to protect investors and the public
interest.'' \8\ Moreover, the Commission finds good cause for approving
the Current Amendment prior to the 30th day after the date the
Amendment is published for comment in the Federal Register pursuant to
Section 19(b)(2) of the Act.\9\ Specifically, the Commission finds that
Variable RAES will appropriately permit RAES market makers to limit
their risk to compensate for increased exposure to the larger RAES
order sizes that go into effect today.
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\8\ 15 U.S.C. 78s(b)(5).
\9\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the Current Amendment, including whether the
Current Amendment 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 File No.
SR-CBOE-99-17 and should be submitted by September 22, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the Current Amendment to SR-CBOE-99-17, be and hereby is
approved on an accelerated basis.\11\
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\10\ 15 U.S.C. 78s(b)(2).
\11\ In approving the Current Amendment, the Commission has
considered its impact on efficiency, competition, and capital
formation, 15 U.S.C. 78c(f).
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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[FR Doc. 99-22696 Filed 8-31-99; 8:45 am]
BILLING CODE 8010-01-M
