[Federal Register: December 30, 2002 (Volume 67, Number 250)]
[Notices]
[Page 79670-79671]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de02-125]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47085; File No. SR-CBOE-2002-46]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change by the Chicago Board Options Exchange, Inc.,
Relating Its AutoQuote Triggered Ebook Execution System
December 23, 2002.
On August 21, 2002, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange''), filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to its AutoQuote
Triggered Ebook Execution (``Trigger'') system. Notice of the proposed
rule
[[Page 79671]]
change was published for comment in the Federal Register on September
30, 2002.\3\ No comments were received on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 46519 (September 20,
2002), 67 FR 61358 (September 30, 2002).
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The Commission originally approved the rule governing the Trigger
system in 2001.\4\ Trigger allows orders resting in the limit order
book to be automatically executed, at their limit prices, in the
limited situation where the bid or offer for a series of options
generated by the Exchange's AutoQuote system (or any Exchange approved
proprietary quote generation system used in lieu of the Exchange's
AutoQuote system) crosses or locks the Exchange's best bid or offer for
that series as established by a booked order. Such orders are executed
against market makers participating in the Exchange's Retail Automated
Execution System (``RAES'').\5\
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\4\ See Securities Exchange Act Release No. 44462 (June 21,
2001), 66 FR 34495 (June 28, 2001). See also Securities Exchange Act
Release No. 45992 (May 29, 2002), 67 FR 38530 (June 4, 2002)
(approving SR-CBOE-2002-12).
\5\ CBOE Rule 6.8(d).
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In general, where Trigger has been activated, when the quote
generated by Autoquote either touches or crosses an order in the book,
the booked order is automatically executed up to the maximum number of
contracts permitted to be entered into RAES. The applicable RAES
contract limit is set by the appropriate Floor Procedure Committee
(``FPC''), but may not be more than 100 contracts.\6\ When the number
of contracts in the book is greater than the applicable RAES contract
limit, the trading crowd will manually execute the remainder. In the
limited circumstance where contracts remain in the book after a Trigger
execution and a disseminated quote remains locked or crossed, orders in
RAES for options of that series are ``kicked-out'' of RAES, and
immediately and automatically routed to the Public Automated Routing
(``PAR'') terminal (absent contrary instructions of the firm) for
manual execution. Because these orders remain RAES eligible, they will
be entitled to receive firm quote treatment when represented in the
crowd.\7\
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\6\ CBOE Rule 6.8(c)(v).
\7\ CBOE Rule 6.8(d)(v); see Securities Exchange Act Release No.
44462 (June 21, 2002), 66 FR 34495 (June 28, 2002) (approving
implementation of Trigger system).
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After the Trigger rules were approved, CBOE proposed, and the
Commission approved, rule changes to permit the implementation of an
options quotation with size system with an automatic decrementation
feature (``Dynamic Quotes with Size'').\8\ Where this new system has
been implemented, it has permitted the Exchange to raise the maximum
eligible size for RAES orders from 100 contracts to the size
disseminated by the Dynamic Quotes with Size system. The Exchange
represents that in some cases, the RAES-eligible order size has been
raised up to 250 contracts. The Exchange further asserts that, because
the Trigger rules are tied to the RAES eligible order size, the size of
booked orders that Trigger removes is now much larger than was
contemplated when Trigger was first implemented in 2001.
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\8\ See Securities Exchange Act Release No. 45676 (March 29,
2002), 67 FR 16478 (April 5, 2002) (approval); Securities Exchange
Act Release No. 45490 (March 1, 2002), 67 FR 10778 (March 8, 2002)
(proposal).
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Therefore, the Exchange proposes to amend the Trigger rule to
provide that the Trigger system will automatically remove orders in the
Exchange's limit order book up to the ``Trigger Volume'' amount. This
amount could be lower than, but could not exceed, the RAES-eligible
size for the particular series of options. The appropriate Floor
Procedure Committee (``FPC'') would be responsible for setting the
Trigger Volume for a particular series of options.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\9\ In
particular, the Commission believes that the proposal is consistent
with Section 6(b)(5) of the Act,\10\ which requires, among other
things, that the rules of an 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 to protect investors and the
public interest.
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\9\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78(c)(f).
\10\ 15 U.S.C. 78f(b)(5).
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The Commission believes that allowing the Trigger Volume to be set
at a size up to, but not more than, the RAES-eligible order size for
the particular series of options will not adversely affect the
execution price of the booked orders because whether removed by Trigger
or executed manually in the trading crowd, these orders may only be
executed at their limit prices. The Commission points out that the
proposed rule change does not alter CBOE members' duty to comply with
the Commission's rule relating to the firmness of quotations.\11\
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\11\ 17 CFR 240.11Ac1-1.
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Additionally, the Commission approves the amended Trigger rule to
provide that the appropriate FPC shall be responsible for setting the
Trigger Volume for a particular series of options. Currently, the
Trigger rule provides only that the appropriate FPC has the authority
to determine those classes of options that are eligible for Trigger.
The Commission believes that it is appropriate to set forth in the rule
that the appropriate FPC also has the authority to set the maximum
number of contracts eligible for Trigger, not to exceed the maximum
size of RAES-eligible orders.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (File No. SR-CBOE-2002-46) be,
and it hereby is, approved.
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\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32923 Filed 12-27-02; 8:45 am]
BILLING CODE 8010-01-P