regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.,
[Federal Register: September 17, 1998 (Volume 63, Number 180)]
[Notices]
[Page 49722-49724]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17se98-95]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40430; File No. SR-CBOE-98-06]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendments Nos. 1 and 2 Thereto by the Chicago Board Options Exchange, Inc. Relating to the Rerouting of RAES Eligible Orders for the Last Five Minutes of the Scheduled Trading Day
September 10, 1998.
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 February 20, 1998, the Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filedwith 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 April 9, 1998, the CBOE filedAmendment No. 1 to the proposed rule change with the Commission.\3\ On August 26, 1998, the CBOE filed Amendment No. 2 to the proposed rule change with the Commission.\4\ The
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Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange clarified when the new rule will operate. See Letter from Timothy H. Thompson, Director, Regulatory Affairs, Legal Department, CBOE, to Ken Rosen, Attorney, Division of Market Regulation (``Division''), Commission, dated March 31, 1998 (``Amendment No. 1'').
\4\ In Amendment No. 2, the Exchange amended the proposed rule language to account for a new ``RAES step-up'' feature and further explained the purpose of and justification for the proposal. See Letter from Timothy H. Thompson, Director, Regulatory Affairs, Legal Department, CBOE, to Richard Strasser, Assistant Director, Division, Commission, dated July 15, 1998 (``Amendment No. 2'').
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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The CBOE proposes to turn off, five minutes prior to the scheduled close of the trading day, the feature of CBOE's Retail Automatic Execution System (``RAES'') \5\ that re-routes orders away from RAES when the RAES price is inferior to the best bid or offer in any other market (``NBBO reject''). Moreover, the design of RAES will not allow the RAES ``step-up'' feature, which provides automatic price improvement for RAES orders in some circumstances, to be used while the NBBO reject feature is turned off.\6\ The text of the proposed rule change is available at the Office of the Secretary, CBOE and at the Commission.
\5\ RAES is the Exchange's automatic execution system for small public customer market or marketable limit orders.
\6\ See Amendments No. 2.
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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 statments.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
Currently, when an order is routed to the Exchange's order routing system and is eligible for execution through RAES,\7\ the system checks whether the bid or offer (as appropriate for the type of order) on any other U.S. exchange is better than the current CBOE displayed price for that series. The Exchange receives quotes from the other exchanges through a feed into its mainframe computer from the Options Price Reporting Authority (``OPRA''). If the CBOE price is no worse than the price elsewhere, the order will be automatically executed at that price through RAES. If there is a better price elsewhere, then, pursuant to Interpretation .02 to CBOE Rule 6.8, the order will be rerouted to the Designated Primary Market-Maker (``DPM'') (in the case of an option assigned to that DPM) or to an Order Book Official (in the case of an option assigned to a market-making crowd) for non-automated handling of the order.\8\ This rerouting function is called the ``NBBO reject'' feature.
\7\ See CBOE Rule 6.8.
\8\ However, when the NBBO is within one pricing increment of the CBOE price, a new RAES ``step-up'' feature may be employed to provide automatic execution in RAES at the NBBO. See Securities Exchange Act Release No. 40096 (June 16, 1998) 63 FR 34209 (June 23, 1998) (order approving proposal).
Interpretation .02 to CBOE Rule 6.8 provides two situations in which the NBBO reject feature may not be employed: where a ``fast market'' in the equity options that are the subject of the orders in question has been declared on the Exchange or where comparable conditions exist in the other market such that the firm quote requirements do not apply. The proposed rule change will add a third situation that will apply to all equity options at the close of the scheduled trading day.
Under the proposal, the Exchange will turn off the NBBO reject feature of RAES for equity options five minutes prior to the scheduled close of the trading day. Thus, where the current rules set a closing time of 3:02 p.m. for equity options, the NBBO reject feature would be turned off at 2:57 p.m. The Exchange is proposing this change because trading is often hectic during the last few minutes of the trading day and the Exchange often receives large numbers of RAES orders at the end of the day. If a large number of orders are rejected, the number of orders to be handled in a nonautomated manner in a finite period of time will increase. The Exchange believes that this situation could interfere with the fair and orderly close of trading.
It should be noted that when a RAES-eligible order is subjected to an NBBO reject, the order must still be filled in the crowd. There is no guarantee that the order will be executed at a better price than the order will be executed at a better price than the order would have received had it been automatically exected on RAES. During the trading day when there is not a fast market, a DPM or trading crowd will likely fill the order at the better bid or offer displayed elsewhere. However, at the end of the trading day, the order, once rerouted, may be filled behind at a number of other orders. By the time the crowd or DPM is able to fill the order, the market may have moved substantially from the time at which the order was re-routed and the order may be filled at a price inferior to that at which RAES would have executed the order. In fact, the order may not be filled at all if the market has moved away from the order's limit price. The Exchange believes that turning off the NBBO reject feature of RAES for the last five minutes of the scheduled trading day will reduce the likelihood of these occurrences. Of course, the Exchange also will still retain the right to turn off the NBBO reject feature at other times during the trading day when a ``fast market'' has been declared or when the other exchange is not honoring its firm quote commitment.
The design of RAES also prevents the RAES ``step-up'' feature from being used while the NBBO reject feature is turned off. \9\ In Amendment No. 2, the Exchange represented that member firms that handle a large percentage of the RAES order flow have expressed their interest in turning off the reject feature, and consequently the RAES ``step- up,'' during the last five minutes of the trading day because, in their informed opinion, it is more problematic if an order does not get filled at all (which is a possibility if the order is rejected for manual handling in the last few minutes of the trading day) than if an order is filled at the displayed CBOE price even though there may have been a better displayed quote on another exchange. These firms have stated that their customers are much more sensitive to the risk that their order will not be filled. In addition, these firms have indicated that in some circumstances the firm may talk to the trading crowd about making an adjustment for a customer if the customer believes he was disadvantaged by such a policy. \10\
\09\ See amendment No. 2.
\10\ See amendment No. 2
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Statutory Basis
The CBOE believes that the proposed rule change will help to allow the Exchange to close its market in a fair and orderly manner. As such, the Exchange believes the rule proposal is consistent with and furthers the objectives of Section 6(b)(5) \11\ of the Act, in that it is designed the perfect the mechanisms of a free and open market and to protect investors and the public interest.
\11\ 15 U.S.C. 78f(b)(5).
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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.
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Self-Regulatory Organization's Statement on Burden 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.
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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) 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.
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Solicitation of Comments
Interests persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. In particular, the Commission seeks comment on firms' continued best execution obligations in light of the proposal. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 the CBOE. All submissions should refer to File No. SR-CBOE-98-06 and should be submitteds by October 8, 1998.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\12\
\12\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland, Deputy Secretary.
[FR Doc. 98-24886Filed9-16-98; 8:45am]
BILLING CODE 8010-01-M
