[Federal Register: August 7, 2003 (Volume 68, Number 152)]
[Notices]
[Page 47116-47119]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au03-108]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48267; File No. SR-CBOE-2003-18]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated To Amend
CBOE Rule 6.24 Relating to Systematizing Orders
July 31, 2003.
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 May 5, 2003, the Chicago Board Options Exchange, Incorporated
(``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 CBOE.
On July 29, 2003, the Exchange submitted Amendment No. 1 to the
proposed rule change.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaces and supercedes the original filing
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange submitted this proposed rule change in order to comply
with the requirement to implement a consolidated options audit trail
system (``COATS''). The Exchange is submitting the proposed rule change
to CBOE Rule 6.24 in connection with subparagraph IV.B.e(v) of the
Commission's September 11, 2000 Order (``Order'').\4\
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\4\ Order Instituting Public Administrative Proceedings Pursuant
to Section 19(h)(1) of the Securities Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions. Securities Exchange Act
Release No. 43268 (September 11, 2000).
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The text of the proposed rule change is set forth below. New text
is in italics; deletions are in brackets.
* * * * *
[[Page 47117]]
Chapter VI
* * * * *
Section B: Member Activities on the Floor
* * * * *
[Orders Required To Be in Written Form] Required Order Information
Rule 6.24
(a) [Transmitted to the Floor. Each order transmitted to the floor
must be recorded legibly in a written form that has been approved by
the Exchange, and the member receiving such order must record the time
of its receipt on the floor. Each such order must be in legible written
form when taken to the post for attempted execution.] Orders Must Be
Systematized. Commencing not later than August 29, 2003, each order,
cancellation of, or change to an order transmitted to the Exchange must
be systematized, in a format approved by the Exchange, either before it
is sent to the Exchange or upon receipt on the floor of the Exchange.
An order is systematized if:
1. it is sent electronically to the Exchange; or
2. it is input electronically into the Exchange's systems
immediately upon receipt on the Exchange, e.g., telephone orders.
(b) [Cancellations and Changes. Each cancellation of, or change to,
an order that has been transmitted to the floor must be recorded
legibly in a written form that has been approved by the Exchange, and
the member receiving such cancellation or change must record the time
of its receipt on the floor.] Exempt classes. The Exchange may exempt
non-multiply listed index and other option classes traded exclusively
on the Exchange other than equity option classes (exempt classes) from
the requirements in paragraph (a) of this Rule. With respect to orders
for exempt classes:
(i) Transmitted to the Floor. Each order for an exempt class
transmitted to the floor must be recorded legibly in a written form
that has been approved by the Exchange, and the member receiving such
order must record the time of its receipt on the floor. Each such order
must be in legible written form when taken to the post for attempted
execution.
(ii) Cancellations and Changes. Each cancellation of, or change to,
an order for an exempt class that has been transmitted to the floor
must be recorded legibly in a written form that has been approved by
the Exchange, and the member receiving such cancellation or change must
record the time of its receipt on the floor.
([c]iii) Executions. A member transmitting from the floor a report
of the execution of an order for an exempt class must record the time
at which a report of such execution is received by such member.
([d]iv) On-floor Market-Maker Orders. Each order for an exempt
class transmitted by a Market-Maker while on the floor, including any
cancellation of or change to such order, must be recorded legibly in a
written form that has been approved by the Exchange, and must be time
stamped immediately prior to its transmission.
* * * Interpretations and Policies
.01 Any member desiring to use an order form other than those
provided by the Exchange must submit such form to the appropriate Floor
Procedure Committee and obtain its approval prior to using such form on
the Floor.
.02 (a) [Without limiting the applicability of the foregoing, the]
The use of hand signal communications on the floor of the Exchange may
be used to initiate an order, to increase or decrease the size of an
order, to change an order's limit, to cancel an order, or to activate a
market order. [Unless an options class is exempted by the Exchange,
a]Any initiation, cancellation, or change of an order relayed to a
floor broker through the use of hand signals also must be relayed to
the floor broker in [written] electronic form[, time-stamped,]
immediately thereafter, unless the Exchange exempts an option class
from this requirement. All other rules applicable to order preparation
and retention, and reporting duties are applicable to orders in
exempted options classes under this Interpretation, except that the
record-keeping obligation lies with the member signaling the order
where a hand signal is used. All cancellations and changes of orders
held by the Board Broker or Order Book Official must be provided in
[written] electronic form.
(b) [Until further notice the following are exempt options classes
under this Interpretation: OEX, SPX, NSX, and DJX.] The Exchange may
exempt non-multiply listed index and other option classes traded
exclusively on the Exchange other than equity option classes under this
Interpretation. The Exchange will publish via regulatory circular those
options classes that it has exempted under this Interpretation.
.03 The appropriate Floor Procedure Committee will from time to
time prescribe the form of Telephone and Terminal Order Formats in a
Manual and the contents of this Manual are hereby incorporated in these
Rules and will have full force and effect as if fully set forth herein.
.04 Stop-limit orders as defined in Rule 6.53(c)(iv) are exempt
from the requirements of paragraph (a) of this Rule until December 11,
2003, or such earlier date as the Exchange's order routing and
execution systems have the functionality to handle stop-limit orders.
.05 Accommodation liquidations as described in Rule 6.54 are exempt
from the requirements of paragraph (a) of this Rule.
* * * * *
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 proposes this amendment to its current rules to comply
with the requirement to implement COATS. The Exchange is submitting the
proposed rule change to CBOE Rule 6.24 in connection with subparagraph
IV.B.e(v) of the Commission's Order,\5\ which requires the options
exchanges to design and implement COATS to ``incorporate into the audit
trail all non-electronic orders (such that the audit trail provides an
accurate, time-sequenced record of electronic and other orders,
quotations and transactions on such respondent exchange, beginning with
the receipt of an order by such respondent exchange and further
documenting the life of the order through the process of execution,
partial execution, or cancellation of that order * * *'' (``Phase V'').
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\5\ Id.
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In order to assure that all non-electronic orders are incorporated
into COATS for Phase V, the proposed rule change would amend CBOE Rule
6.24, which currently requires orders to be in written form. The
proposed rule change would require that each order, change to
[[Page 47118]]
an order, or cancellation of an order transmitted to the Exchange must
be ``systematized'', in a format approved by the Exchange, either
before it is sent to the Exchange or immediately upon receipt on the
floor of the Exchange.\6\
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\6\ CBOE notes that the execution or partial execution of an
order has been incorporated into COATS in Phase II, and as described
in Paragraph II of the formal COATS Plan that the options exchanges
previously have provided to the Commission.
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Each order, change to an order, or cancellation of an order may be
systematized in one of two ways. If an order, change to an order, or
cancellation of an order is sent electronically to the Exchange, it is
systematized. Alternatively, if an order, change to an order, or
cancellation of an order is input electronically into the Exchange's
systems immediately upon receipt on the Exchange, it is systematized.
The Exchange believes that the systematization requirement may be
fulfilled in practice in a number of ways. The key is that the order
must be systematized when the order is routed to the floor for
execution. For example, under the proposed rule change, an order would
meet the requirements of the rule if a floor broker in the trading
crowd received an order over the phone and at the same time had a
person from his or her booth input the order electronically. The
requirements of the rule also would be satisfied if someone from the
upstairs trading desk called a floor broker in the trading crowd on the
floor with an order, while a clerk at the upstairs trading desk was
simultaneously sending the order to the floor electronically. While it
is possible that the floor broker in each of these situations would
receive and begin the representation of the order prior to the arrival
of the electronic order, the order entered electronically would be
entered and routed in a manner consistent with the record keeping
obligations and the requirements of COATS.\7\
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\7\ The Exchange recognizes the need for effective and proactive
surveillance for activities such as trading ahead and front-running.
It currently conducts automated surveillance for such activities and
will incorporate a review of order systemization as part of such
surveillance. The Exchange also intends to implement supplementary
surveillance and examination programs related to the systemization
of orders requirement promptly after this requirement is instituted,
which are designed to address, among other things, trading ahead and
front-running.
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Currently, the deadline to implement Phase V of COATS is August 29,
2003.\8\ The Exchange intends to make the proposed changes to CBOE Rule
6.24 effective not later than August 29, 2003, or such later date as
authorized in writing by the Directors of the Commission's Division of
Market Regulation, Division of Enforcement, and the Office of
Compliance, Inspections and Examinations.
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\8\ On June 10, 2003, the Directors of the Commission's Division
of Market Regulation, Office of Compliance Inspections and
Examinations, and Division of Enforcement granted CBOE and the other
floor-based options exchanges an extension of time until August 29,
2003, to implement Phase V of COATS.
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Under the proposed change to Interpretation and Policy .04, the
Exchange proposes to exempt from the systematization requirement stop-
limit orders as defined in CBOE Rule 6.53(c)(iv) until December 11,
2003, or such earlier time as the Exchange's order routing and
execution systems (such as COMPASS, ORS, PAR) have the functionality to
handle stop-limit orders. The Exchange represents that stop-limit
orders as defined in CBOE Rule 6.53(c)(iv) represent a very small
percentage of the types of orders sent to and executed on the Exchange.
The Exchange has an active systems project that will provide the
functionality to handle stop limit orders in its order routing and
execution systems.\9\
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\9\ In their June 10, 2003, letter to the Exchange, the
Directors of the Commission's Division of Market Regulation, Office
of Compliance Inspections and Examinations, and Division of
Enforcement also granted CBOE an extension of time until December
11, 2003, so that CBOE can modify its order routing and execution
systems such that they would have the functionality to handle stop-
limit orders.
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The proposed rule change would also permit the Exchange to exempt
from the systematization requirement non-multiply listed index option
classes and other option classes traded exclusively on the Exchange
other than equity option classes (``exempt classes''). For example, the
Exchange could exempt from the systematization requirement the
following option classes traded exclusively on the Exchange: the
Standard & Poor's 100[reg] index option class (OEX), the Standard &
Poor's 100[reg] index option class (SPX), options on the Dow Jones
Industrial Average\SM\ (DJX), and options on the Diamonds[reg] (DIA).
Equity option classes traded solely on the Exchange would not be
exempted from the systematization requirement. Orders in exempt classes
would be required to be in a legible written form approved by the
Exchange. This proposed change is consistent with the current practice
permitted under CBOE Rule 6.24.
The proposed rule change would also keep the current Interpretation
and Policy .02(a) of CBOE Rule 6.24, which permits the use of hand
signal communications on the floor to, among other things, initiate an
order, cancel an order or to change material terms of an order provided
that such communications are immediately thereafter relayed in written
form, except in certain classes exempted by the Exchange. The proposed
rule change would require that such communications be relayed
immediately in electronic form rather than written form, unless an
option class is exempted from this requirement. Currently, as provided
in Interpretation and Policy .02(b) of CBOE Rule 6.24, the Exchange
exempts the OEX, SPX, and DJX option classes, which are non-multiply
listed index option classes. The Exchange proposes to amend
subparagraph (b) of Interpretation .02 to state it may exempt non-
multiply listed index and other option classes traded exclusively on
the Exchange other than equity option classes under this
Interpretation. The Exchange will publish via regulatory circular those
options classes that it has exempted under Interpretation .02.
Finally, the Exchange has added a new Interpretation and Policy .05
to CBOE Rule 6.24, which states that accommodation liquidations as
defined in CBOE Rule 6.54 are exempted from the systematization
requirement.
2. Statutory Basis
CBOE believes that the proposed rule change is consistent with
section 6(b) of the Act \10\ in general and furthers the objectives of
Section 6(b)(5) \11\ in particular in that it should promote just and
equitable principles of trade, serve to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and protect investors and the public interest. The proposed
rule change will promote just and equitable principles of trade and
protect investors and the public interest by electronically enhancing
the audit trail for orders by incorporating orders into COATS. This
enhanced audit trail will permit CBOE to conduct surveillance of the
activity on the Exchange and reconstruct markets in a more efficient
and effective manner.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE 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.
[[Page 47119]]
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
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change; or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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 Section. 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-2003-18 and should be submitted by August 28, 2003.
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. 03-20126 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P