Pursuant to section 19(b)(2) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, notice is hereby given that on August 2, 2000, the Chicago Board Options Exchange, Inc. (“CBOE” or the “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. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The CBOE proposes to adopt the “CBOE Best Executive Assurance Program SM” (“BestExSM”), which consists of existing Exchange rules and procedures, and to file the same as a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of those rules and procedures. Start Printed Page 49039
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
Currently, the obligation of broker-dealers to provide best execution of their customers' orders is receiving increasing attention in the options markets. In part this is due to the fact that a greater number of options are traded in multiple markets than has been the case historically, which means that brokers now have greater choices concerning where to direct their customers' orders from execution. It is also due to a practice known as payment for order flow, whereby specialists or market makers offer to pay a specified amount to brokers for directing orders to them. This practice, which was introduced a number of years ago in the over-the-counter stock market and on certain regional stock exchanges, has now begun to appear in options markets, most recently including the CBOE. the availability of payment for order flow has made it more important for firms to be able to demonstrate that they have given first priority to the obligation to provide best execution of their customers' orders, and have not permitted this obligation to be compromised by the firms' self-interest in obtaining such payment.
In order to make its members aware of how the CBOE's systems, procedures and rules help them satisfy their best execution obligations when they direct orders to the CBOE for execution, the CBOE has recently announced its intention to introduce the BestEx program. The BestEx program is based on existing rules of the CBOE that govern the operation of its auction market, including its Retail Automatic Execution System (“RAES”), and on Exchange systems such as the Order Routing System (“ORS”) and Public Automated Routing (“PAR”) workstations and on certain recent enhancements to those systems.
The BestEx program applies to customer orders received through ORS. The first step in processing these orders to assure that executions take place at the best available price is to direct all orders received over ORS that appear to be RAES-eligible to RAES for execution in accordance with Exchange Rule 6.8. Interpretation and Policy .02 under that Rule provides that no orders may be executed on RAES at a price that is inferior to the national best bid or offer (“NBBO”) as identified in RAES. Instead, these orders are either executed automatically in RAES at the NBBO, or, if the NBBO is better than the RAES price by more than an established “step-up amount,” the orders are rerouted to PAR. Customer orders received over ORS that do not appear to be RAES-eligible go directly to PAR.
Recent enhancements to PAR provide enhanced access to NBBO pricing information at the workstation. This places the floor broker in a position to know that an execution on CBOE will be at a price that is at least as good as the NBBO, unless there are valid reasons for believing that what appears to be a better price in another market is not obtainable or is otherwise not desired. Finally, in the event that an ORS order is executed on the CBOE at a price inferior to the NBBO, an advisory to that effect will automatically be sent to designated regulatory staff on the Exchange Floor, who will assist the members involved in the trade in deciding whether a price adjustment is called for under the circumstances.
As part of the BestEx Program, the Exchange will distribute daily and monthly reports to each member firm that identify orders that may have been executed outside of the NBBO, show what if any action was taken to adjust the price, and provide statistical data to enable firms to do their own analysis of the extent to which orders directed to the CBOE receive best execution. The combination of these systems, rules and procedures are designed to place members of the CBOE in a better position to know what is the NBBO at any time, and to give them greater assurance that the orders they direct to the CBOE over ORS will receive best execution. The CBOE recognizes that the current competitive environment has placed greater emphasis on the best execution obligations of its members. It is the CBOE's hope that, once members are able to employ the data from the BestEx program to demonstrate that they have satisfied their duty of best execution of customer orders, they will choose to direct more of their orders to the CBOE.
The Exchange represents that the BestEx program is designed to provide member firms with greater assurance that they have acted in a manner consistent with the fulfillment of their duty of best execution when they direct their customers' orders to the Exchange for execution. Accordingly, the Exchange believes that the proposed rule change is consistent with, and in furtherance of the objectives of, the Act, including specifically Section 6(b)(5)  thereof, which requires the rules of exchanges to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and to protect 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 that is not necessary or appropriate in furtherance of the purposes of the Act.
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
Because the CBOE has properly designated the proposed rule change as constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule, it has become effective upon filing pursuant to section 19(b)(3)(A)(i) of the Act  and Start Printed Page 49040Rule 19b-4(f)(1) thereunder. At any time within 60 days of the filing of this proposed rule change, the Commission may summarily abrogate the 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
The Commission invites interested persons 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, 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-00-32 and should be submitted by August 31, 2000.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. The CBOE recently implemented a marketing fee that allows funds to be made available to DMPs for their use in paying for order flow. See Securities Exchange Act Release No. 43112 (August 3, 2000), File No. SR-CBOE-00-28.Back to Citation
4. In connection with the Exchange's implementation of the marketing fee to be used to attract order flow to the Exchange, the CBOE recently issued Regulatory Circular RG00-109, which describes regulatory issues raised by payment for order flow. Among other things, the Regulatory Circular emphasizes the obligation of member firms to provide best execution of their customers' orders without regard to considerations of payment for order flows.Back to Citation
5. The BestEx Program is described in Exhibit A to the proposed rule change, which is available at the places specified in item IV below.Back to Citation
[FR Doc. 00-20256 Filed 8-9-00; 8:45 am]
BILLING CODE 8010-01-M