[Federal Register: October 21, 2004 (Volume 69, Number 203)]
[Notices]
[Page 61877-61879]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21oc04-145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50540; File No. SR-CBOE-2004-57]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 Thereto by the Chicago Board Options Exchange, Incorporated Relating
to the Permanent Approval of Autobook
October 14, 2004.
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 August 17, 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 CBOE. The
Exchange filed Amendment No. 1 to the proposed rule change on October
8, 2004.\3\ The Commission is publishing this notice, as amended, to
solicit comments on the proposed rule change from interested persons
and to grant accelerated approval to the proposed rule change, as
amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Patrick Sexton, Assistant General Counsel,
CBOE, to Deborah Flynn, Assistant Director, Division of Market
Regulation, Commission, dated October 8, 2004 (``Amendment No. 1'').
Amendment No. 1 amends the proposed rule change by deleting the word
``all'' in the second sentence of the seventh paragraph in Item 3.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to adopt the Exchange's automated limit order
display facility (``Autobook'') on a permanent basis. The text of the
proposed rule change is set forth below. Deletions are in brackets.
Rule 8.85 DPM Obligations
(a) No change
(b)(i)-(vi) No Change.
(vii) Autobook Pilot. Maintain and keep active on the DPM's PAR
workstation at all times the automated limit order display facility
(``Autobook'') provided by the Exchange. The appropriate Exchange Floor
Procedure Committee will determine the Autobook timer in all classes
under that Committee's jurisdiction. A DPM may deactivate Autobook as
to a class or classes provided that Floor Official
[[Page 61878]]
approval is obtained. The DPM must obtain such approval no later than
three minutes after deactivation. [The Autobook Pilot expires on
October 19, 2004, or such earlier time as the Commission has approved
Autobook on a permanent basis.]
To the extent that there is any inconsistency between the specific
obligations of a DPM set forth in subparagraph (b)(i) through (b)(vii)
of this Rule and the general obligations of a Floor Broker or of an
Order Book Official under the Rules, subparagraph (b)(i) through
(b)(vii) of this Rule shall govern.
(c)-(e) No change.
* * * * *
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 III 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
Autobook is an enhancement to the Designated Primary Market-Maker's
(``DPM's'') PAR workstation that automatically facilitates the entry of
eligible customer limit orders into the limit order book at the end of
a configurable period of time provided such limit orders have not
previously been addressed manually by the DPM. As such, CBOE believes
that Autobook assists and facilitates DPMs' compliance with their
regulatory obligation relating to the display of eligible customer
limit orders that improve the price or increase the size of the best
disseminated CBOE quote as required by CBOE Rule 8.85(b).
On April 18, 2003, the Commission approved the implementation of
Autobook on a one-year pilot basis.\4\ Subsequently, on April 20, 2004,
the Commission extended the Autobook pilot until October 19, 2004 or
such earlier time as the Commission has approved Autobook on a
permanent basis.\5\
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\4\ See Securities Exchange Act Release No. 47701, 68 FR 22426
(April 28, 2003) (approving SR-CBOE-2003-16.)
\5\ See Securities Exchange Act Release No. 49584, 69 FR 22893
(April 27, 2004) (granting accelerated approval to SR-CBOE-2004-22).
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The Exchange believes that Autobook has been an effective tool for
DPMs in that it has assisted DPMs to comply with their regulatory
obligations relating to the display of eligible customer limit orders
as required by CBOE rules. Accordingly, CBOE seeks permanent approval
of Autobook.
As was previously described in CBOE's rule filing that initiated
the Autobook pilot, Autobook does not relieve DPMs of their obligations
to book eligible customer limit orders on their PAR workstations
immediately per CBOE Rule 8.85.\6\ To the extent a DPM excessively
relies on Autobook to display eligible limit orders without attempting
to address these orders immediately, it could violate its due diligence
obligation. Brief or intermittent periods of reliance on Autobook out
of necessity, however, would not violate the obligation.\7\ The
Exchange periodically issues regulatory circulars discussing the issue
of excessive reliance upon Autobook.\8\
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\6\ In its Adopting Release for the Display Rule in the equities
markets, the Commission stated that to comply with the requirement
that display take place ``immediately,'' specialists must display
(or execute or re-route) eligible customer limit orders ``as soon as
practicable after receipt which under normal market conditions would
require display no later than 30 seconds after receipt.'' Securities
Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290
(September 12, 1996).
\7\ For example, a DPM for a class that experiences an
unexpected surge in trading activity would not violate its
obligations if, because the DPM is not physically able to address
eligible limit orders within 30 seconds, Autobook displays such
orders at the end of the time period.
\8\ The Exchange has provided statistics to Commission staff
that demonstrate that DPMs have not excessively relied upon Autobook
to display eligible limit orders without attempting to address these
orders immediately. The Exchange will continue to surveil DPMs for
excessive reliance on Autobook.
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Autobook is an exchange-mandated facility that operates only on DPM
PAR workstations. The appropriate Exchange Committee is responsible for
establishing the Autobook timer in all classes under that Committee's
jurisdiction, and the timer may not exceed the customer limit order
display requirement then in effect on the Exchange. The appropriate
Exchange Committee also has the authority to determine whether to
utilize Autobook to automatically display any other types of orders
that are not subject to CBOE's limit order display requirements.
A DPM may deactivate Autobook as to a class or classes only upon
approval by a floor official. The DPM must obtain floor official
approval as soon as practicable but in no event later than three
minutes from the time of deactivation. If the DPM does not receive
approval within three minutes after deactivation, the Exchange will
review the matter as a regulatory issue.\9\ Floor officials would grant
approval only in instances when there is an unusual influx of orders or
movement of the underlying that would result in gap pricing or other
unusual circumstances.\10\ The Exchange would document all instances
where a floor official grants approval.
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\9\ The Exchange believes that this is consistent with NYSE
treatment. See Securities Exchange Act Release No. 41386 (May 10,
1999), 64 FR 26809 (May 17, 1999).
\10\ The Exchange believes that this is consistent with Amex
Rule 170, Commentary .10. See Securities Exchange Act Release No.
42952 (June 16, 2000), 65 FR 39210 (June 23, 2000).
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The Exchange would continue to conduct surveillance to ensure that
DPMs comply with their obligation to execute or book all eligible limit
orders as required by CBOE rules. CBOE also commits to conducting
surveillance designed to detect whether DPMs as a matter of course rely
on Autobook to display eligible limit orders. A practice of excessive
reliance upon Autobook would be reviewed by CBOE's Regulatory Division
as a possible due diligence violation.
2. Statutory Basis
Because Autobook assists and facilitates DPMs' compliance with
their regulatory obligations concerning the display of eligible
customer limit orders as required by CBOE rules, the Exchange believes
that the proposed rule change, as amended, is consistent with section
6(b) of the Act\11\ in general and furthers the objectives of section
6(b)(5)\12\ in particular in that it is designed to promote just and
equitable principles of trade and to protect investors and the public
interest. Furthermore, the Exchange believes that the proposed changes
are consistent with the requirement that an exchange's rules not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 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, as amended,
will impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
[[Page 61879]]
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. 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. 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-2004-57 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-2004-57. 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. Copies of the
filing also will be available for inspection and copying at the
principal offices of the CBOE. 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-2004-57 and should be submitted on or before
November 12, 2004.
IV. Commission Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange. In
particular, the Commission believes that the proposed rule change is
consistent with the requirements of sections 6(b)(5) of the Act\13\ and
the objectives of section 11A(a)(1)(c) of the Act.\14\ Section 6(b)(5)
requires, among other things, that the rules of the Exchange be
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.\15\ With respect to section 11A, Congress found that
it is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure the
availability to brokers, dealers and investors of information with
respect to quotations for and transactions in securities, and to assure
the practicability of brokers investing investors' orders in the best
market.
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\13\ 15 U.S.C. 78f(b)(5).
\14\ 15 U.S.C. 78k-1(a)(1)(C).
\15\ In approving the proposed rule, 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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Specifically, the Commission believes that the proposed rule change
should help to ensure the availability of information with respect to
quotations by assisting DPMs in displaying limit orders in a timely
fashion. The Commission notes that Autobook is a tool designed to
ensure that all customer limit orders are displayed no later than 30
seconds after receipt. Nonetheless, the Commission emphasizes that its
approval of Autobook on a permanent basis does not relieve DPMs of
their obligations to immediately display customer limit orders. To that
end, the Commission expects the Exchange to actively surveil and
appropriately discipline its members for excessive reliance on this
tool.
The Commission finds good cause for accelerating approval of the
proposed rule change, as amended, prior to the thirtieth day after
publication in the Federal Register. The Commission notes the substance
of the proposed rule change has previously been published for public
comment and no comments were received. The Commission also notes that
the proposal is substantially similar to the rules of another self-
regulatory organization. In addition, the Commission notes that
accelerated approval of the proposed rule change will permit the
continued use, without interruption, of Autobook, the pilot for which
is scheduled to expire on October 19, 2004. Accordingly, the Commission
finds good cause, consistent with section 19(b)(2) of the Act,\16\ to
approve the proposed rule change, as amended, prior to the thirtieth
day after publication of the notice of filing.
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\16\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (File No. SR-CBOE-2004-57), as
amended, is approved.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2735 Filed 10-20-04; 8:45 am]
BILLING CODE 8010-01-P