Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, notice is hereby given that on October 22, 2001, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the CBOE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and to grant accelerated approval to the proposed rule change.
17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The CBOE proposes to amend CBOE Rule 8.51, Firm Disseminated Market Quotes, to address customer limit orders. Below is the text of the proposed rule change. Additions are italicized.
Rule 9.51 Firm Disseminated Market Quotes
(a)-(b) no change
(c) Firm Quote Size
(1) no change
(2) The firm quote requirement size for non-broker-dealer orders shall be the size that the Exchange periodically publishes along with the quotes disseminated to vendors. In the event the Exchange has not published a size along with its quotes for a particular series, then the firm quote requirement size for non-broker-dealer orders shall be that size published by the Exchange in a different manner (e.g., on its website). The Exchange also will publish separately the firm quote requirement size for broker-dealer orders. In the case of broker-dealer orders, if the size for a particular series disseminated along with the quotes is less than the size published for broker-dealer orders, then the firm quote requirement for broker-dealer orders shall be the size published along with the quotes.
(a) When the disseminated quote represents a customer limit order in EBook, the firm quote requirement for non-broker-dealer orders shall be the greater of the size of the customer limit order or a size predetermined by the appropriate FPC. When the disseminated quote represents both a customer limit order in EBook and the trading crowd's quote, the firm quote requirement for non-broker-dealer orders shall be the aggregate size of the customer limit order and the size that the Exchange periodically publishes for that particular series.
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 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. The 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 November 17, 2001, the Commission amended rule 11Ac1-1 under the Act (“Quote Rule”) to require options exchanges to publish firm quotes. The amended Quote Rule requires options exchanges to either: (1) comply with the Quote Rule as it applies in the equity markets and collect from their members and make available to vendors the size associated with each quotation; or (2) establish by rule and periodically publish the quotation size for which their members' quotations are firm. On March 30, 2001, the Exchange submitted a proposal to amend CBOE rule 8.51, Firm Disseminated Market quotes, to conform to the requirements of the Quote Rule. The Commission approved this proposal initially on a pilot basis on April 2, 2001 and, subsequently, on a permanent basis on June 2, 2001. This filing amends CBOE rule 8.51 to codify the Exchange's firm quote treatment of customer limit orders.
17 CFR 240.11Ac1-1. See Exchange Act Release No. 43591 (Nov. 17, 2000), 65 FR 75439 (Dec. 1, 2000).
See Exchange Act Release No. 44145 (April 2, 2001), 66 FR 18662 (April 10, 2001) (approving SR-CBOE-2001-15 on a pilot basis.
See Exchange Act Release No. 44383 (June 2, 2001), 66 FR 30959 (June 8, 2001) (approving SR-CBOE-2001-15 on a permanent basis.
CBOE does not currently have the systems capability to decrement actual quotation size to reflect executions except when the quotation size represents an order in EBook. For this reason, when Autoquote or a manual quote establishes the best price on the Exchange, the Exchange's firm quote requirement for non-broker-dealer orders is the size that the Exchange periodically publishes on its website and along with the bid-ask quotes disseminated to vendors.
See CBOE rule 8.51(c)(2).
When a customer limit order in EBook establishes the best bid or offer, however, CBOE complies with the Quote Rule in a different manner. As discussed above, CBOE systems are able to decrement disseminated size for executions when the disseminated size represents a booked order. For this reason, when a customer limit order in EBook establishes the best bid or offer, CBOE disseminates the actual size of the booked limit order. In this instance, the Exchange must be firm for the greater of its disseminated size or a number predetermined by the appropriate floor procedure committee (“FPC”). The effect of this provision is two-fold. First, it ensures that the Exchange will be firm for at least the size of the disseminated booked order. Second, it also allows the appropriate FPC to establish a higher firm quote size guarantee when a booked order is the prevailing price. For example, in conjunction with Automated Book Price Split-price, if the equity floor procedure committee establishes a book price commitment quantity of ten contracts, it could correspondingly establish the minimum firm quote size guarantee at ten contracts. Thus, the Exchange would be firm for either the size of the booked order or ten contracts, whichever is greater. In no event would the firm quote size be smaller than the actual size of the disseminated booked order. The size of the minimum firm quote guarantee would be published on the CBOE Web site.
Book Market Indicators are disseminated to Options Price Reporting Authority (“OPRA”) when the book bid, offer, or both improve, or equal the Designated Primary Market Marker/Crowd (“DPM/Crowd”) quote. If the Book Bid improves or equals the DPM/Crowd market bid, then the Book Market Indicator “B” will be disseminated with the quote to OPRA. If the Book Offer improves or matches the DPM/Crowd market offer, then the Book Market Indicator “O” is disseminated with the quote. If the Book Bid and Offer improves or equals the DPM/Crowd market, then the Book Market Indicator “C” is disseminated with the quote.
When a customer limit order in EBook matches the best bid or offer of the trading crowd, the size disseminated to OPRA, as well as the firm quote requirement, is the aggregate of the booked order and the size that the Exchange periodically publishes. For example, if in a particular series EBook contains an order for eleven contracts and the firm quote size as published on the Exchange's Web site is 50 contracts, then the disseminated size as well as the firm quote size would be 61 contracts for that series. When trades execute against the booked order, however, the disseminated size would decrement. When executions extinguish the booked order, the firm quote requirement would be the size that the Exchange periodically publishes on its Web site and along with the bid-ask quotes disseminated to vendors. To codify the firm quote rules pertaining to customer limit orders, the Exchange proposes to add section (c)(2)(a) to CBOE Rule 8.51.
Using the above example, an execution of 12 contracts (which would extinguish the booked order of 11 contracts) would result in a new firm quote requirement, which would be the size (i.e., 50 contracts) that appears on the CBOE Web site.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with and furthers the objectives of section 6 of the Act in general, and in particular, with section 6(b)(5), in that it is designed to perfect the mechanisms of a free and open market and a national market system, protect investors and the public interest, and promote just and equitable principles of trade by increasing transparency and by providing the market place with more information upon which to base order routing decisions.
B. Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose any burden on competition.
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
Pursuant to section 19(b)(2) of the Act, the Exchange requests accelerated effectiveness of this rule filing. The Exchange believes that acceleration will enable it to continue uninterrupted its compliance with the Quote Rule. Moreover, the CBOE believes that acceleration will enable it to provide greater liquidity guarantees to customers when customer limit orders match the best bid or offer of the trading crowd. For these reasons, the Exchange believes it is both appropriate and in the public interest of investors for the Commission to accelerate the effective date of this filing.
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. 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 also will be available for inspection and copying at the principal office of the CBOE. All submissions should refer to File No. SR-CBOE-2001-56 and should be submitted by December 14, 2001.
V. Commission Findings and Order Granting Accelerated Approval of the Proposed Rule Change
After careful consideration, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, section 6(b)(5) of the Act in that the proposed rule change has been designed to remove impediments to and to perfect the mechamism of a free and open market and a national market system, while also protecting investors and the public interest. Specifically, the Commission believes that by disseminating the size of customer limit orders and providing a firm quote at a guaranteed size equal to the aggregate of a customer limit order and the crowd guarantee at the same price, the proposed rule change should provide increased transparency to the benefit of market participants that trade listed options.
In approving this proposal, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78f(b)(5).
The Commission finds good cause, consistent with section 19(b)(2) of the Act, for granting the Exchange's request for approval of the proposed rule change prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. The Commission believes that granting accelerated approval to the proposed rule change should allow the CBOE to continue its compliance with the Quote Rule without interruption or delay.
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the Exchange's proposed rule change (File No. SR-CBOE-2001-56) is approved on an accelerated basis.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29254 Filed 11-21-01; 8:45 am]
BILLING CODE 8010-01-M