[Federal Register: January 14, 2005 (Volume 70, Number 10)]
[Notices]
[Page 2682-2684]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14ja05-103]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51003; File No. SR-CBOE-2005-01]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Incorporated, Relating to Allowing Market Participants To
Submit Orders for Automatic Execution
January 10, 2005.
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 December 31, 2004, 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 and II below, which Items have been prepared by the Exchange.
The Exchange filed the proposal as a ``non-controversial'' proposed
rule change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and
Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to allow market participants to submit orders for
automatic execution. 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 statutory basis for, the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of those 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 aspects of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
When CBOE market participants \5\ interact with orders in the
electronic book (``the book'' or ``E-book''), CBOE Rule 6.45A(c)
governs the allocation of such orders.\6\ Generally, if only one market
participant (``MP'') interacts with the order in the book, he/she will
be entitled to receive the entire order. If, however, more than one MP
attempts to interact with the same order in the book, a ``quote
trigger'' process initiates. Under the quote trigger process, the first
MP to interact with the book order starts a counting period lasting N-
seconds whereby each MP that submits an order within that ``N-second
period'' becomes part of the ``N-second group'' and is entitled to
share in the allocation of that order via the formula contained in the
rule. The Exchange proposes to provide an alternative method by which
MPs may interact with orders in the book.
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\5\ Per CBOE Rule 6.45A, the term market participants includes
an in-crowd Market-Maker, a Market-Maker complying with the in-
person requirements of CBOE Rule 8.7.03(B)(1) who submits quotes
from off of the floor of the Exchange through the facilities of the
Exchange, an in-crowd DPM, an e-DPM, and a floor broker representing
orders in the trading crowd.
\6\ Market participants currently interact with orders in the
book in one of two ways: by submitting a quote or by submitting an
order. Such orders are referred to as ``I-orders.''
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[[Page 2683]]
As proposed, MPs will have the ability to submit orders that will
be eligible to execute automatically against resting orders in the
book. As such, execution will be based on time priority such that the
first order, whether from a MP, a customer, or broker-dealer, will have
priority for up to the size of his/her order. Subsequent orders will be
entitled to allocations only to the extent the first order did not
exhaust the size of the order in the book. CBOE Rule 6.13 governs
orders submitted for automatic execution and orders submitted by MPs
would be subject to these requirements. Orders submitted by MPs that
are CBOE Market-Makers (``MMs'') will be treated as orders from
``Options Exchange Market-Makers,'' as defined in CBOE Rule
6.13(b)(i)(C)(ii)(A), and therefore will be subject to the same
restrictions imposed by CBOE Rule 6.13(b)(i)(C)(iii), which generally
limits all options exchange MMs (whether CBOE or away MMs) to one
execution (on the same side of the market) per 15-seconds.\7\
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\7\ CBOE Rule 6.13(b)(i)(C)(iii) provides: ``With respect to
orders eligible for submission pursuant to paragraph (b)(i)(C)(ii),
members shall neither enter nor permit the entry of multiple orders
on the same side of the market in an option class within any 15-
second period for an account or accounts of the same beneficial
owner. The appropriate FPC may shorten the duration of this 15-
second period by providing notice to the membership via a Regulatory
Circular that is issued at least one day prior to implementation.
The effectiveness of this rule shall terminate on January 12,
2005.'' The Exchange has proposed to extend the effectiveness of
this Rule until October, 2005. The Exchange represents that it has
the ability to surveil for violations of this rule by CBOE MPs.
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Upon implementation of this new rule, CBOE MMs will have two
alternative methods by which they can access orders in the book.\8\ One
will be through the use of I-orders (with allocation via the ``N-second
group'' as described above) and the other will be through the use of an
order submitted for automatic execution (with allocation based on time
priority). CBOE MMs may choose which method they want to utilize to
send in orders. Functionally, the vast majority of MMs will have one
handheld device through which they submit either an I-order or an order
for automatic execution.\9\ Upon approval of this rule, MMs could
choose to submit two orders simultaneously.\10\ For example, a MM may
submit an order for automatic execution immediately followed by an I-
order. In this respect, if the MM's auto-ex order is first, he/she will
receive an execution. If, however, the MM is not first and instead was
``beaten'' to the order by another CBOE MM, the first MM may still
participate in the order by virtue of sending in the I-order.
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\8\ Floor brokers already have this dual ability with respect to
orders they represent as agent. They may choose to submit the order
for automatic execution (in accordance with CBOE Rule 6.13) or they
may determine to join the ``N-second group.'' Away MMs, too, have
the ability to submit orders for automatic execution (in accordance
with CBOE Rule 6.13) or they may have a floor broker represent their
orders as part of the ``N-second group.''
\9\ The routing of the order the MM submits is dictated by the
way the MM marks the order. An order designated with an ``I'' origin
code routes directly to the book and participates in the ``N-second
group.'' An order submitted for automatic execution by a MM will be
marked with an ``M'' origin code and will route through ORS where it
executes in accordance with Rule 6.13.
\10\ CBOE has confirmed that the limit on sending more than one
order within 15 seconds in CBOE Rule 6.13(b)(i)(C)(iii), as
described in fn. 7 supra, only applies to auto-ex orders. Hence, a
MP could send two orders simultaneously as long as one of them is
sent as an I-order. Telephone conversation between Deborah L. Flynn,
Assistant Director, Division of Market Regulation, Commission and
Steve Youhn, Assistant Secretary, CBOE on January 5, 2005.
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With respect to priority between the two types of orders, the first
order received by the Exchange has priority over the other. For
example, assume two MMs in the trading crowd both attempt to execute
against an order in the book by sending in different types of orders.
MM A sends an I-order while MM B sends an order for automatic
execution. The first order received by the Exchange has priority. If it
is the I-order, then the order submitted by the MM B for automatic
execution will only execute to the extent there is a balance remaining
after the I-order executes.\11\ If the auto-ex order is received first,
then the I-order submitted by MM A will only execute to the extent
there is a balance remaining after the auto-ex order executes.\12\ An
order submitted by a MM for automatic execution will not participate in
the ``N-second group.''
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\11\ When the I-order executes against the order in the book, it
starts the N-second process.
\12\ If there is a balance remaining against which the I-order
executes, the N-second process starts again when the I-order
executes.
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2. Statutory Basis
The Exchange represents that allowing MMs to submit orders for
automatic execution in accordance with CBOE Rule 6.13 will enhance
their ability to provide liquidity and manage risk. Accordingly, CBOE
believes the proposed rule change is consistent with the Act and the
rules and regulations under the Act applicable to a national securities
exchange and, in particular, the requirements of section 6(b) of the
Act.\13\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \14\ requirement that the rules
of an exchange be designed to prevent fraudulent and manipulative acts,
to promote just and equitable principles of trade, to perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78(f)(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. Rather, CBOE believes that the proposed rule
change will have a positive effect on competition, which is appropriate
and in furtherance of the purposes of the Act. Specifically, the
proposal would allow CBOE MMs to have the ability to be first with
respect to executing against a booked order, which entitles them to
receive all of that order (up to the size of the order the MM submits).
Currently, the only way a MM can take 100% of a booked order is if no
other market participant submits an order during the ``N-second''
period. The Exchange believes that the ability to receive a larger
allocation will serve as an incentive to a MM to make more vigorous
markets. The Exchange believes that the proposal also puts CBOE MMs on
equal footing with their away-market counterparts, who have the ability
to submit orders to CBOE for automatic execution. For these reasons,
CBOE believes that the proposal will have a significantly positive
effect on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated the proposed rule change as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A)(iii) of the
Act \15\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\16\ The
Exchange represents that 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) by its terms, does not become operative for 30 days after the
date of this filing, or such shorter time as the Commission may
designate if consistent with the protection of
[[Page 2684]]
investors and the public interest. The Exchange has requested that the
Commission waive the five-day pre-filing notice requirement and the 30-
day operative delay period for ``non-controversial'' proposals and make
the proposed rule change effective and operative upon filing.
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\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 17 CFR 240.19b-4(f)(6).
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The Commission has determined to waive the five-day pre-filing
notice requirement and the 30-day operative delay period.\17\ The
Commission notes that the proposal would only give CBOE market makers
the option of sending their proprietary orders for automatic execution,
an option that other CBOE market participants already enjoy. For this
reason, the Commission sees no reason to delay the operation of the
proposed change. Therefore, the foregoing rule change has become
immediately effective and operative upon filing pursuant to Section
19(b)(3)(A)(iii) of the Act \18\ and Rule 19b-4(f)(6) thereunder.\19\
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\17\ For purposes only of 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).
\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the 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 Act.\20\
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\20\ See 15 U.S.C. 78s(b)(3)(C).
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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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2005-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CBOE-2005-01. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
CBOE-2005-01 and should be submitted on or before February 4, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-135 Filed 1-13-05; 8:45 am]
BILLING CODE 8010-01-P