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Self-Regulatory Organizations; Chicago Board Options Exchange, Inc.; Order Approving Proposed Rule Change Relating to Handling of Customer Orders

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Start Preamble July 11, 2002

On June 10, 2002, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), 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 to establish the Large Order Utility (“LOU”). Through LOU, eligible customer orders larger than CBOE's maximum “auto-ex” size for the relevant option would be stopped at the Exchange's disseminated price up to the size of the Exchange's disseminated quote, and subsequently routed to the trading crowd for possible price improvement and allocation in open-outcry.[3] Thus, LOU would allow for price-improvement while guaranteeing an execution at a price equal to or better than the stop price. If price improvement was not attainable in the open-outcry, the order would be allocated at the stop price among the members of the trading crowd under specified procedures.[4]

The proposed rule change was published for comment in the Federal Register on June 19, 2002.[5] The Commission received no comments on the proposal. On July10, 2002, the CBOE filed Amendment No. 1 to the proposed rule change, in which it requested that the Commission find good cause to approve the proposed rule change prior to the thirtieth day after its publication in the Federal Register.[6]

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange [7] and, in particular, the requirements of Section 6 of the Act [8] and the rules and regulations thereunder. The Commission finds specifically that the proposed rule change is consistent with Section 6(b)(5) of the Act [9] because, by automatically securing the Exchange's disseminated prices for customer orders up to the disseminated size of the Exchange, while allowing for potential price improvement for those orders, it should benefit customers and improve the overall efficiency of the market. In addition, the Commission finds that the manner of allocating contracts in the crowd under the proposed rule change is consistent with equitable principles.

The Commission finds good cause, consistent with Section 19(b)(2) of the Act, to approve the proposed rule change prior to the thirtieth day after the date of publication of the notice of filing thereof in the Federal Register. The Commission notes that the CBOE has represented that all required systems work for LOU has been completed and successfully tested, and that the CBOE is prepared to begin utilizing the system within a week of approval by the Commission.[10] The Commission believes that accelerated approval of this proposal should permit the CBOE to immediately begin providing customers with the benefits described above, and serve to enhance competition among the markets.

It is therefore ordered, pursuant to section 19(b)(2) of the Act[11] , that the proposed rule change (File No. SR-CBOE-2002-31) be, and it hereby is, approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[12]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  To be eligible for LOU, an incoming order would be required to: (i) be a market order or marketable limit order that is not for an account in which a member or any non-member broker-dealer (including foreign broker-dealer) has an interest; (ii) be of a size greater than the eligibility limit of CBOE's Retail Automatic Execution System (“RAES”) for the subject option series; (iii) be in an option class which is designated by the appropriate Floor Procedure Committee as eligible for LOU; and (iv) not be an order routed to CBOE through intermarket linkage. Further, at the time of the order's receipt, (i) the CBOE quote would be required to be priced equal to the National Best Bid or Offer; (ii) the requirements of CBOE Rule 6.8.B (governing automated book priority for larger than RAES-size public customer orders received through the Exchange's Order Routing System) would have to be in effect for the subject option class; and (iii) the CBOE quote could not be a manual quote.

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4.  The order would be assigned in a manner consistent with existing open-outcry procedures under CBOE Rules 6.45 and 8.87. To the extent any order is not fully assigned in open-outcry, an “In-Person Wheel” would evenly assign contracts to market-makers present in the crowd up to a 5-contract maximum per order. If the In-Person Wheel has been exhausted for a particular LOU order and a balance still remains on the LOU order, the entirety of such balance would be assigned in accordance with the RAES trade allocation methodology in effect for the subject option class.

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5.  See Securities Exchange Act Release No. 46073 (June 13, 2002), 67 FR 41743.

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6.  See Letter from Angelo Evangelou, Senior Attorney, Legal Division, CBOE, to Ira Brandriss, Special Counsel, Division of Market Regulation, Commission, dated July 9, 2002 (Amendment No. 1).

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7.  In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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10.  See Amendment No. 1, supra note 6.

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[FR Doc. 02-18224 Filed 7-18-02; 8:45 am]