On October 9, 2002, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”), and Rule 19b-4 thereunder, a proposed rule change to adopt new rules governing the operation of the intermarket linkage (the “Linkage”). The proposed rule change was published for comment in the Federal Register on December 27, 2002. The Commission received no comments on the proposed rule change. On January 30, 2003, the Exchange filed Amendment No. 1 to the proposed rule change. This order approves the proposed rule change, provides notice of filing of Amendment No. 1 and grants accelerated approval to Amendment No. 1.
II. Description of Proposal
In general, the proposed rules contain relevant definitions, establish the conditions pursuant to which market makers may enter Linkage orders, impose obligations on the Exchange Start Printed Page 6528regarding how it must process incoming Linkage orders, and establish a general standard that members should avoid trade-throughs. The proposed rules establish potential regulatory liability for members who engage in a pattern or practice of trading through other exchanges, whether or not the exchanges traded through participate in the Linkage, provide procedures to unlock and uncross markets, and codify the “80/20 Test” contained in section 8(b)(iii) of the Plan, which provides that a market maker on an Exchange would be restricted from sending principal orders (other than P/A orders, which reflect unexecuted customer orders) through the Linkage if the market maker effects less than 80 percent of specified order flow on the Exchange. The proposed rule change also establishes the fees that will apply to Linkage transactions except for Satisfaction Orders (which result after a trade-through).
The Commission has reviewed the CBOE's proposed rule change and finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and with the requirements of section 6(b). In particular the Commission finds that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism for a free and open market and a national market system, and, in general, to protect investors and the public interest in accordance with section 6(b)(5) of the Act. The Commission also finds that the proposed fee change is consistent with section 6(b)(4) of the Act  in that it represents an equitable allocation of reasonable dues, fees and other charges among its members and other persons using its facilities.
The Commission believes that the rules proposed by the CBOE will adequately govern the operation of the Linkage as envisioned in the Plan. The Commission believes that these rules will help to ensure that the Linkage is operated fairly and effectively, in accordance with the principles of the Act and the Plan.
The Commission also finds good cause for approving proposed Amendment No. 1 prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. Amendment No. 1 proposes several changes to the Exchange's original proposal that are designed to conform the Exchange's rules governing linkage more closely to the Plan. The provisions of the Plan have already been subject to notice and comment, and have been approved by the Commission. The changes proposed in Amendment No. 1 do not raise any novel regulatory issues, and therefore, it is appropriate for the Commission to accelerate approval of Amendment No. 1.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning Amendment No. 1 to the proposed rule change, including whether Amendment No. 1 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 Amendment No. 1 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 Exchange. All submissions should refer to File No. SR-CBOE-2002-61 and should be submitted by February 28, 2003.
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-CBOE-2002-61), be, and hereby is, approved, and that Amendment No. 1 to the proposed rule change be, and hereby is, approved on an accelerated basis.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
4. See letter from Angelo Evangelou, Senior Attorney, Legal Division, CBOE, to Jennifer Colihan, Special Counsel, Division of Market Regulation, Commission, dated January 29, 2003 (“Amendment No. 1”). In Amendment No. 1, the Exchange proposes to: (1) Amend the definition of “Linkage Order” contained in proposed CBOE Rule 6.80 to state that such orders are immediate or cancel orders; (2) amend the definition of “Reference Price” contained in proposed CBOE Rule 6.80 to conform to the definition of such term in the Plan for the Purpose of Creating and Operating an Intermarket Options Linkage (“Plan”); (3) amend proposed CBOE Rule 6.81 to clarify the specialist's obligation to address a linkage order when such order is not eligible to be executed automatically; (4) amend proposed CBOE Rule 6.83 to clarify language regarding liability for trade-throughs at the end of the trading day and to request approval of this provision only for a one-year pilot period; (5) amend proposed CBOE Rule 942 to clarify that members may not engage in a pattern or practice of trading through; and (6) establish fees for certain Linkage orders.Back to Citation
5. Trade-throughs occur when broker-dealers execute customer orders on one exchange at prices inferior to another exchange's disseminated quote.Back to Citation
6. Approved by the Commission in Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000), as subsequently amended. See Securities Exchange Act Release Nos. 44482 (June 27, 2001), 66 FR 35470 (July 5, 2001); 46001 (May 30, 2002), 67 FR 38687 (June 5, 2002); 47274 (January 29, 2003); and 47298 (January 31, 2003).Back to Citation
7. In approving this rule proposal, the Commission notes that it has also considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).Back to Citation
11. 15 U.S.c. 78s(b)(2).Back to Citation
[FR Doc. 03-3098 Filed 2-6-03; 8:45 am]
BILLING CODE 8010-01-P