[Federal Register: August 14, 2003 (Volume 68, Number 157)]
[Notices]
[Page 48650-48652]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14au03-97]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48293; File No. SR-CBOE-2002-55]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Board Options
Exchange, Inc. Relating to Permanent Approval of the Rapid Opening
System
August 6, 2003.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 16, 2002, the Chicago Board Options Exchange, Inc.
(``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 February 6, 2003, CBOE 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. 78(s)(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Jaime Galvan, Attorney II, Legal Division,
CBOE, to Terri Evans, Assistant Director, Division of Market
Regulation, dated January 17, 2003 (``Amendment No. 1''). In
Amendment No. 1, CBOE described its plans to incorporate the
AutoQuotes sent into its Rapid Open System (``ROS'') by market
makers into its illegal quote width surveillance program; explained
how the implementation of Phase V of the Consolidated Options Audit
Trail plan would facilitate the Exchange's efforts at monitoring
activities on ROS; provided greater detail regarding the
observations of ROS openings conducted by Exchange staff during the
pilot period; and made minor changes to its discussion section.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to adopt ROS on a permanent basis.\4\ The text of the
proposed rule change appears below. Deleted text is in brackets.
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\4\ CBOE also proposed to extend the ROS pilot program. However,
on September 25, 2002, CBOE submitted another proposal to extend the
ROS pilot program, which replaced and superseded the portion of SR-
CBOE-2002-55 that proposed to extend the ROS pilot program. This
proposal was effective upon filing. See Securities Exchange Act
Release No. 46572 (September 30, 2002), 67 FR 62508 (October 7,
2002).
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Rule 6.2A
(a)-(c) No change.
[(d) Pilot Program.
This Rule (and the sentences in Rule 6.2 and Rule 6.45 referring to
this Rule) will be in effect until September 30, 2002 on a pilot
basis.]
* * * Interpretation and Policies:
.01-.02 Unchanged.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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. 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
1. Purpose
On February 9, 1999, the Commission approved, on a pilot basis, the
implementation of ROS.\5\ ROS is a system developed by the Exchange to
open an entire options class, all series, as a single event, based on a
single underlying value. The ROS pilot program is due to expire on
September 30, 2003.\6\ The Exchange proposes to make the ROS pilot
program permanent.
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\5\ See Securities Exchange Act Release No. 41033 (February 9,
1999), 64 FR 8156 (February 18, 1999) (``Pilot Program Approval
Order''). ROS is governed by CBOE Rule 6.2A.
\6\ The Commission has extended the ROS pilot program five
times. See Securities Exchange Act Release Nos. 42596 (March 30,
2000), 65 FR 18397 (April 7, 2000) (extending the pilot program
until September 30, 2000); 43395 (September 29, 2000), 65 FR 60706
(October 12, 2000) (extending the pilot program until September 30,
2001), 44891 (October 1, 2001), 66 FR 51483 (October 9, 2001)
(extending the pilot program until September 30, 2002); 46572
(September 30, 2002), 67 FR 62508 (October 7, 2002) (extending the
pilot program until March 31, 2003; and 47573 (March 26, 2003), 68
FR 15780 (April 1, 2003) (extending the pilot program until
September 30, 2003).
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CBOE represents that ROS has successfully facilitated expedited
openings of options classes on the Exchange, thereby improving market
efficiency for all market participants. CBOE represents that ROS has
provided the Exchange's market-makers with the ability to open option
classes within seconds of the opening of the underlying security. CBOE
represents that by entering into open trading more quickly using ROS,
customer orders have been addressed in open trading in a more timely
manner. CBOE represents that ROS has also prevented large numbers of
orders from queuing on the Exchange's book and live ammo screens
immediately after the opening, thus, providing the order book official
and designated primary market maker staff with the ability to handle
the orders in a more expeditious manner.
In the Pilot Program Approval Order, the Commission requested that
the Exchange study certain issues during the pilot program and produce
a report to the Commission addressing those issues prior to seeking
permanent approval of ROS. CBOE represents that the issues raised by
the Commission were the following: (1) How and when market-makers set
ROS risk and size thresholds, (2) how often such thresholds are
exceeded and result in the adjustment of AutoQuote,\7\ (3) the effect
of AutoQuote adjustments on the quality of customer executions, (4) any
effects on existing order execution priority, and (5) the handling of
and adjustments made for non-bookable orders. CBOE represents that
prior to the submission of this proposed rule change, the Exchange
submitted a report
[[Page 48651]]
to the Commission addressing each of these issues in depth (``ROS
Study'').
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\7\ Under Interpretation .02 to CBOE Rule 6.2A, the term
``AutoQuote'' means either the Exchange's AutoQuote system or a
proprietary autoquote system operated by a member of the trading
crowd where the particular ROS class is traded.
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With respect to issues 1 and 2, the Exchange represents that it has
observed that in general, market-makers have set the contract and delta
thresholds on ROS at a level which ensures that an options class that
has orders to trade will not auto-open, in order to avoid openings
based on erroneous prints in the underlying security or delayed updates
to bid/ask information on underlying securities. Nonetheless, the
Exchange represents that it has still been able to open classes within
seconds of the opening of the underlying class because ROS can open
classes very quickly even if they are not set to auto-open. CBOE
represents that based on Exchange staff observations of ROS openings
during the pilot period, AutoQuote adjustments by market-makers after
the ``lock'' is initiated are rare.
With respect to issue 3, the Exchange believes that market-maker
adjustments to AutoQuote have had no adverse effect on the quality of
customer executions. In fact, CBOE represents that AutoQuote
adjustments are made to ensure the accurate pricing of options based on
the opening price of the underlying security. Market-makers are
required to price contracts in a manner consistent with their
obligations under CBOE Rule 8.7(b)(iv). The Exchange has published
regulatory circulars to remind market makers of their obligation to set
AutoQuote in accordance with Exchange rules.\8\ CBOE believes that
scrutiny by customers and firms is another factor that ensures that
market-makers adjust AutoQuote values consistent with their obligation.
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\8\ See CBOE Regulatory Circulars RG99-91 (April 14, 1999) and
RG02-34 (May 28, 2002).
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The Exchange represents that it has submitted along with the ROS
Study a written description of the methods employed by the Exchange to
surveil market-maker activities on ROS. The Exchange believes that
other than the situation where ROS has opened based on an incorrect
underlying value, there have been no customer complaints regarding ROS
opening prices.
With respect to issue 4, the Exchange believes that ROS has served
to protect the quality of executions received by non-bookable orders
that participate in the opening. The Exchange has developed a procedure
for including non-bookable orders (firm, broker-dealer and customer
contingency orders) into the opening process. CBOE represents that this
procedure has been incorporated into CBOE Rule 6.2A and has been
detailed in two regulatory circulars.\9\ The Exchange believes ROS has
enhanced the quality of customer executions and has served to provide
non-bookable orders represented before the open with the executions
that they deserve on the opening. CBOE represents that as is
demonstrated by the statistics in the ROS Study, during the review
period noted, the vast majority of orders that traded during the
``opening period'' (defined as the ROS opening plus the first minute
after the ROS opening) received the ROS opening price or better.\10\
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\9\ See CBOE Rule 6.2A(ii), and Regulatory Circulars RG99-35
(February 10, 1999) and RG00-40 (March 13, 2000).
\10\ See Amendment No. 1, supra note 3.
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The Exchange represents that it is committed to ensuring that non-
bookable orders that participate on the opening continue to receive
quality executions. The Exchange represents that the implementation of
the requirement under Phase V of the Consolidated Options Audit Trail
(``COATS'') Plan that all non-electronic orders must be captured
electronically for audit trail purposes will facilitate the Exchange's
efforts in monitoring on an ongoing basis the executions received by
non-bookable orders that participate in the opening. \11\ CBOE
anticipates that after the implementation of COATS Phase V, a non-
bookable order sent to the Exchange prior to the opening will be
captured electronically and incorporated into the Exchange's audit
trail. CBOE believes this will facilitate its regulatory staff's
ability to investigate with more speed and efficiency any complaint
regarding the execution received by a non-bookable order on the
opening, in that the Exchange will now have an electronic record of the
time of receipt of the order, in addition to the order information and
the execution price of the order.\12\
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\11\ The COATS Plan is a plan that the options exchanges are
required to submit to the Commission in order to comply with Section
IV.B.e. of the Order Instituting Public Administrative Proceedings
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934,
Making Findings and Imposing Remedial Sanctions. See In the Matter
of Certain Activities of Options Exchanges, Securities Exchange Act
Release No. 43268, September 11, 2000; Administrative Proceeding
File No. 3-10282.
\12\ See Amendment No. 1, supra note 3.
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With respect to issue 5, the Exchange represents that it has
observed that firms consistently wait until after the ROS opening has
been completed to represent non-bookable orders. CBOE believes that by
waiting until after ROS opens, the firms have a better sense of where
they may trade the order after opening quotes have been disseminated.
CBOE represents that the statistics in the ROS Study demonstrate that
few, if any, non-bookable orders are being represented before ROS
openings. The Commission stated in the Pilot Program Approval Order
that prior to considering permanent approval of ROS, it expected the
Exchange to develop a workable plan for electronic incorporation of
non-bookable orders on ROS. The Exchange believes, for the reasons set
forth above, that permanent approval of ROS should not be contingent
upon the development of a plan to electronically incorporate non-
bookable orders on ROS. CBOE believes that such a systems change would
have very little impact on ROS trading due to the fact that non-
bookable orders are virtually non-existent before the open. The
Exchange represents that it continues to consider modification of EBook
to include other order types, but it is uncertain at this time when
such a project might be completed.
Based on the successful operation of ROS over the past three years,
the Exchange proposes that the Commission approve ROS on a permanent
basis.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\13\ in general, and furthers the
objectives of Section 6(b)(5),\14\ in particular, in that it is
designed to promote just and equitable principles of trade and to
protect investors and the public interest, because ROS has improved
market efficiency for all market participants by successfully
facilitating expedited openings of options classes on the Exchange
during the pilot period.
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\13\ 15 U.S.C. 78f(b).
\14\ 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
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
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i)
[[Page 48652]]
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 proposal, 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 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-2002-55 and should be
submitted by September 4, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary,
[FR Doc. 03-20696 Filed 8-13-03; 8:45 am]
BILLING CODE 8010-01-P