[Federal Register Volume 62, Number 170 (Wednesday, September 3, 1997)]
[Notices]
[Pages 46528-46530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23341]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38974; File No. SR-CBOE-97-32]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Inc. Relating to the Operation and Enforcement of Rules
Relating to the Transmission of Orders to Exchange Electronic Order
Systems Including RAES
August 26, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 22, 1997, 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 self-regulatory organization. The Commission is
publishing this notice to solicit
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comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to issue a regulatory circular pertaining to
the administration and enforcement of Exchange rules regarding the
routing of ineligible orders to Exchange electronic order handling
systems including RAES and the electronic public customer order book.
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 self-regulatory organization
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 self-regulatory organization
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 purpose of the proposed rule change is to consolidate and
clarify in a single regulatory circular (referred to as ``Regulatory
Circular 97-aa'') the Exchange's policies concerning the administration
and enforcement of the rules governing the entry of orders to Exchange
electronic order handling systems including the Exchange's Retail
Automatic Execution System (``RAES'') \2\ and the electronic public
customer order book.\3\ In addition, the rule filing sets forth steps
that member firms may take to avoid liability for the actions of their
correspondent firms in entering ineligible orders to RAES and the
electronic book.
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\2\ RAES is the Exchange's automatic execution system for small
public customer market or marketable limit orders.
\3\ The electronic public customer order book (``EBOOK'') is an
automated system whereby booked orders are automatically sorted and
filed in price and time sequence. As orders are traded from EBOOK,
Last Sale prices are automatically generated and overhead screens on
the CBOE floor are simultaneously updated. Upon trade endorsement by
Exchange book staff, execution reports are instantaneously
generated.
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Prohibition on RAES Unbundling
The first section of the circular merely restates and clarifies the
terms of current CBOE rules and circulars concerning the order
eligibility requirements that orders must meet in order to be executed
on RAES. The Exchange believed it was important to combine these
criteria into one circular to provide guidance to Exchange members
regarding these matters.
First, the circular reiterates that to be eligible for RAES, orders
must be market or marketable limit orders of public customers.\4\ In
addition, RAES will accept market or marketable limit orders with
certain contingencies, pursuant to the terms of a regulatory circular
approved by the Commission.\5\ The circular also restates Exchange
rules that specify that eligible public customer orders are orders for
an account in which a member or a non-member broker-dealer does not
have an interest.\6\
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\4\ See Rule 6.8(a)(1) and Rule 24.15(a)(1).
\5\ See Regulatory Circular RG97-67 (June 11, 1997) which
permits market and marketable limit orders tagged with AON (All or
None), IOC (Immediate or Cancel), FOK (Fill or Kill), or MIN
(Minimum quantity) to be executed on RAES. For MIN orders, the total
order quantity must be within the RAES volume. This circular was
approved in Securities Exchange Act Release No. 38702 (May 30,
1997), 62 FR 31184 (June 6, 1997).
\6\ Rule 6.8(a)(i) specifies that RAES is for the purpose of
routing ``small public customer market or marketable limit orders. *
* * as defined in Rule 7.4(a) regarding placing of orders on the
public customer book.'' Rule 7.4(a) states that no order shall be
placed on the public customer book in which a member, any non-member
joint venture participant, or any non-member-broker/dealer has an
interest.
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The circular continues by stating that generally the volume
limitation for eligible RAES orders is ten contracts or fewer. The
circular also states the volume parameters for a number of option
classes where the eligible RAES order size is greater than ten
contracts. The circular points out that a complete list of the
applicable volume parameters is available from Exchange Support
Systems.
Finally, the first section of the circular restates the Exchange's
policy, which is also set forth in Exchange rules, that orders for more
than the applicable contract limit are never eligible for execution on
the RAES system and may not be split in an attempt to make the parts of
the order eligible.\7\
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\7\ See Exchange Rule 6.8(a) and Exchange Rule 24.15(a).
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Regulatory Requirements Governing the Entry of Orders Over Exchange
Systems
The second section of the regulatory circular sets forth the
Exchange's long-standing interpretations regarding the liability of
member firms for the use of RAES and other Exchange electronic order-
handling systems by those firms' correspondent firms.\8\ In addition,
this section of the circular sets forth recommended steps that a member
firm may take to avoid potential disciplinary action for conduct of its
correspondent firms in the use of RAES and other Exchange electronic
order-handling systems.
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\8\ For purposes of the circular, a correspondent firm is any
firm or customer that has been given access to the Exchange's
systems by the member firm or by another correspondent of the member
firm.
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First, the second section of the circular states that members and
member firms who accept, execute, clear, and/or transmit agency orders
for correspondent firms or who provide facilities for correspondent
firms to transmit orders for execution via the Exchange's systems,
including the Exchange's RAES systems or the electronic public customer
book, should provide written notice to all correspondent firms that
explains the proper use of those systems, including the eligibility of
orders for entry and the prohibition of unbundling RAES orders.
The circular further states that when the member firms provide
facilities for correspondent firms to transmit orders for execution via
Exchange systems, including the Exchange's RAES system or the
electronic public customer order book, the member firms should ensure
that correspondents have adequate written procedures to monitor and
supervise the entry of orders to minimize misuses of Exchange systems
and the potential for errors. The circular states that member firms may
accomplish this by (a) obtaining and maintaining as part of their books
and records, a copy of their correspondents' written control procedures
pertaining to electronic order entry or (b) establishing the procedures
by which a correspondent must abide and having the correspondent sign
an agreement stating that it will abide by such procedures.
The circular further states the Exchange's long-standing practice
of seeking disciplinary action against member firms for the violative
activity of the correspondent firms in connection with the improper use
of RAES and the Exchange's electronic order-handling systems where the
member firm has not taken reasonable steps to ensure compliance by the
correspondent firm.
For purposes of the circular, a correspondent firm is any firm or
customer that has been given access to the Exchange's systems by the
member
[[Page 46530]]
firm or by another correspondent of the member firm. Member firms
should instruct their correspondents not to give access to the
Exchange's systems to other customers without the prior knowledge and
consent of the member firm through whose facilities such access would
be provided.
The Exchange has carried out an increasing number of investigations
of violative activity involving correspondent use of the Exchange's
electronic order-handling systems. In addition, the Exchange has issued
disciplinary decisions against member firms due to correspondents'
improper use of Exchange electronic order-handling systems. The
Exchange believes that the record-keeping suggested by the proposed
regulatory circular will serve as an educational tool to help eliminate
violations of the rules governing the use of such systems.
2. Statutory Basis
The Exchange represents that proposed rule change is consistent
with the objectives of Section 6(b)(5) \9\ in that it will serve to
promote just and equitable principles of trade and protect investors
and the public interest.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change constitutes a stated policy, practice or
interpretation with respect to the meaning, administration, or
enforcement of the Exchange's rules and, therefore, has become
effective pursuant to Section 19(b)(3)(A)(i) of the Act \10\ and
subparagraph (e) of Rule 19b-4 thereunder.\11\
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\10\ 15 U.S.C. 78s(b)(3)(A)(i).
\11\ 17 CFR 240.19b-4.
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At any time within 60 days of the filing of the proposed rule
change, 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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room. Copies of such filing also will
be available for inspection and copying at the principal office of the
Chicago Board Options Exchange. All submissions should refer to File
No. SR-CBOE-97-32 and should be submitted by September 24, 1997.
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. 97-23341 Filed 9-2-97; 8:45 am]
BILLING CODE 8010-01-M
