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Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to Broker-Dealer Access on RAES

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Start Preamble October 3, 2002.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),[1] and Rule 19b-4 thereunder,[2] notice is hereby given that on September 25, 2002, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “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 is proposing to allow broker-dealer (“BD”) orders in equity options to be eligible for routing through the Exchange's Retail Automatic Execution System (“RAES”). 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 Exchange 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange currently allows BD orders in certain index option series to receive automatic execution through RAES, subject to the conditions contained in Interpretation and Policy .01 (“I&P .01”) to CBOE Rule 6.8. CBOE hereby proposes to amend I&P .01 to allow BDs to submit orders through RAES in certain equity option classes and/or series.[3] Under the proposal, the Exchange intends to vest the appropriate floor procedure committee (“FPC”) with the authority to determine the classes and/or series in which BDs may submit orders through RAES.[4] As such, the Equity Floor Procedure Committee (“EFPC”) would have responsibility for determining the eligible equity option classes and/or series while the Index FPC (“IFPC”) would have the authority for determining the eligible index option classes and/or series (with the exception of the S&P 500, which falls under the jurisdiction of the SPX FPC). In this regard, the Exchange notes that with respect to equity options, the EFPC could determine to make BD orders eligible for automatic execution in the 100 most active classes, or conversely, the EFPC may allow BD orders in all series in all equity option classes. Pronouncements regarding eligible classes and/or series will be made by Regulatory Circular. The Exchange does not propose any changes to the types of BD orders eligible for automatic execution.[5]

Currently, there are three primary limitations on BD access to RAES: (1) BD orders may not automatically Start Printed Page 63479execute against orders in the book; [6] (2) the eligible size limit for BD orders may be established at a level lower than that for public customer orders; [7] and (3) BD orders may not be eligible for automatic step-up.[8] The Exchange proposes to retain these three limitations (with the modifications described in the accompanying footnotes.)

BD orders executed through RAES will continue to be subject to the requirements of CBOE Rule 6.8. In this regard the Exchange notes that BD orders and public customer orders will both be subject to CBOE Rule 6.8(e)(iii), which prohibits the entry of multiple orders in a put and/or call class within a 15-second period for an account or accounts of the same beneficial owner.[9] Correspondingly, the Exchange proposes herein to amend CBOE Rule 6.8A (Electronically Generated and Communicated Orders) to clarify its applicability to BD orders executed through RAES. CBOE Rule 6.8A currently applies to all RAES-eligible orders, however, because it was adopted prior to the allowance of BD orders in RAES, it makes reference to the term “public customers.” Now that BD orders are eligible for execution through RAES, the reference to public customers in CBOE Rule 6.8A is incorrect. This proposal therefore eliminates that reference. The Exchange notes that Phlx Rule 1080, Commentary .05(i) codifies this same principle (i.e., BD orders are subject to the restriction against electronically generated orders).

Finally, the current rule was approved on a pilot basis until November 20, 2002.[10] The Exchange proposes to eliminate the pilot status of the current rule and seek permanent approval of the new rule. The Exchange believes there are several reasons why permanent approval is justified. First, CBOE initially proposed the pilot program as a way to allow it to evaluate the effectiveness of the program after six months of operation. The pilot program was NOT proposed due to any SEC concerns. Therefore, the Exchange believes that there are no attendant regulatory concerns that would require continued operation under pilot status. Second, the pilot program has worked well and has attracted order flow to the Exchange without causing any operational problems or difficulties. Expanding the rule to apply to equities similarly will not cause any operational problems and will enhance the Exchange's competitive position. Third, the PCX rule was approved on a permanent basis,[11] accordingly, there is precedent for permanent approval. In this respect, the Exchange notes that all floor-based exchanges have (or are in the process of adopting) approved rules that grant BD access to automatic execution systems. Finally, the pilot expires in November and it is likely that SEC approval of this filing will not occur until late September or early October. By that time, the Exchange would have to submit an additional rule filing to seek permanent approval anyways. In short, this filing raises no new or unique issues of substance and, therefore, the Exchange believes it is practical to request permanent approval in this proposal instead of having to submit an additional filing a few weeks later.

2. Statutory Basis

The Exchange believes that this proposal will enhance the ability of BD orders to receive automatic executions in equity options, which should provide greater certainty to BDs with respect to their routing decisions. The Exchange further believes that this proposal, by allowing BD orders to receive automatic executions, will also increase depth and liquidity in those affected classes. Accordingly, the Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, the requirements of Section 6(b) of the Act.[12] Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) [13] requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest.[14]

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any burden on competition 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

The foregoing rule change has been filed by the Exchange as a “non-controversial” rule change pursuant to section 19(b)(3)(A)(i) of the Act [15] and subparagraph (f)(6) of Rule 19b-4 thereunder.[16] Consequently, because the foregoing rule change: (1) Does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for thirty days from the date on which it was filed or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, and the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five days prior to the filing date, it has become effective pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4 thereunder.

A proposed rule change filed under Rule 19b-4(f)(6) [17] normally does not become operative prior to thirty days after the date of filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange seeks to have the proposed rule change become operative immediately so that it may compete with other options exchanges.

The Commission, consistent with the protection of investors and the public interest, has determined to make the proposed rule change effective as of the date of this order.[18] The Commission Start Printed Page 63480notes that the other options exchanges currently permit BD orders to access their automatic execution systems and the Commission believes that this proposed rule change could enhance competition for BD orders in the options markets.

At any time within 60 days of the filing of such 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 Exchange Act.

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, 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 CBOE. All submissions should refer to File No. SR-CBOE-2002-56 and should be submitted by November 1, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[19]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  Correspondingly, BDs will be eligible to submit orders in certain index option classes and/or series. Currently, BDs may submit orders in certain index option series.

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4.  The current rule allows the Exchange to determine the products in which BD orders may be submitted to RAES.

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5.  Currently, the Exchange may allow all categories of BD orders to receive automatic execution or it may allow only those BD orders that are not for the accounts of market makers or specialists to qualify for automatic execution.

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6.  CBOE Rule 6.8.01(b). The Exchange proposes to keep this provision but renumber it as 6.8.01(b)(1).

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7.  This provision has been renumbered from 6.8.01(c)(1) to 6.8.01(b)(2).

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8.  This provision has been renumbered from 6.8.01(c)(2) to 6.8.01(b)(3). In addition, the Exchange amends this provision to clarify that BD orders that are ineligible for automatic execution by opertion of this section shall be routed either to PAR or BART for manual handling.

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9.  See also Phlx Rule 1080, Commentary .05(iii), which contains the identical restriction and was approved by the SEC. Exchange Act Release No. 45484 (February 27, 2002), 67 FR 10465 (March 7, 2002).

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10.  See Securities Exchange Act Release Nos. 45967 (May 20, 2002), 67 FR 37888 (May 27, 2002) and 46113 (June 25, 2002), 67 FR 44486 (July 2, 2002).

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11.  See Securities Exchange Act Release No. 45032 (November 6, 2001), 66 FR 57145 (November 14, 2001).

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14.  Commission staff has provided interpretative guidance to the Exchange regarding the application of Section 11(a) of the Act, 15 U.S.C. 78k(a), to the RAES system. See letter from Paula Jenson, Deputy Chief Counsel, Division of Market Regulation, Commission, to Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE, dated May 16, 2002.

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15.  15 U.S.C. 78s(b)(3)(A)(i).

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18.  For purposes of only accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 02-26018 Filed 10-10-02; 8:45 am]