[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82418-82420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33119]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43745; File No. SR-CBOE-00-58]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to an
Interim Intermarket Linkage
December 19, 2000.
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 November 15, 2000, 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. On December 13, 2000, the Exchange submitted Amendment No.
1 to the proposed rule change.\3\ 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\ In Amendment No. 1, the Exchange made technical changes to
the proposed rule text and specified that the proposed interim
intermarket linkage would be effective for a pilot period expiring
on January 31, 2002. See letter from Timothy Thompson, Assistant
General Counsel, Legal Department, CBOE, to Nancy Sanow, Assistant
Director, Division of Market Regulation, Commission, dated December
12, 2000 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing to adopt a rule providing for the
implementation of ``interim linkages'' with the other option exchanges.
Below is the text of the proposed rule change. Additions are
italicized.
CHAPTER VIII
Section B: Trading Crowds
Pilot Program for Away Market Maker Access
Rule 8.52
(a) Definitions. For the purposes of this Rule, the terms below
have the following definitions.
(1) ``Corresponding Rule'' means a rule of a Participating
Exchange that is substantially identical to this Rule 8.52.
(2) ``Customer Size'' means the lesser of (i) the number of
option contracts that the Participating Exchange sending the order
guarantees it will automatically execute at its disseminated
quotation in an Eligible Option Class for Public Customer Orders and
(ii) the number of option contracts that the Participating Exchange
receiving the order
[[Page 82419]]
guarantees it will automatically execute at its disseminated
quotation in an Eligible Option Class for Public Customer Orders.
This number shall be no fewer than 10.
(3) ``Eligible Away Market Maker'' (``EAMM'') means, with
respect to an Eligible Option Class, a market-maker, as that term is
defined in Section 3(a)(22) of the Exchange Act, on a Participating
Exchange:
(A) is assigned to, and is providing two-sided quotations in the
Eligible Option Class; and
(B) that is participating in its market's automatic execution
system in such Eligible Option Class.
(4) ``Eligible Away Designated Primary Market-Maker''
(``EADPM'') means: with respect to the American Stock Exchange and
the Philadelphia Stock Exchange, a Specialist in an Eligible Option
Class; with respect to the International Securities Exchange, a
Primary Market Maker in an Eligible Option Class; and with respect
to the Pacific Exchange, a Lead Market Maker in an Eligible Option
Class.
(5) ``Eligible Option Class'' means all option series overlying
a security, including both put and call options, which class is
traded by the Exchange and at least one other Participating
Exchange, to the extent that such Participating Exchanges have
mutually agreed to include the option class in the Pilot Program.
(6) ``Eligible Order'' means an order for the account of a
Designated Primary Market Maker or an Eligible Away Market Maker
that can be sent to a Participating Exchange marked as a Public
Customer Order pursuant to provisions of paragraphs (b), (c), and
(d) of this Rule.
(7) ``Participating Exchange'' means (i) the Exchange and (ii)
one or more of the American Stock Exchange, the International
Securities Exchange, the Pacific Exchange, and the Philadelphia
Stock Exchange, as the President of the Exchange, or his designee,
has designated from time to time as having adopted a Corresponding
Rule.
(8) ``Pilot Program'' means the program established by this Rule
and the Corresponding Rules of the other Participating Exchanges.
(9) ``Principal Size'' means the number of option contracts that
two or more Participating Exchanges mutually agree that they will
automatically execute during the Pilot Program at their disseminated
quotation for orders sent for the principal account of a market-
maker, and EAMM, or an EADPM that does not correspond to a
Underlying Customer Order. This number shall be no fewer than 10.
(10) ``Underlying Customer Order'' means an unexecuted Public
Customer Order for which the Designated Primary Market Maker or
EADPM is acting as agent and which underlies an Eligible Order.
(b) Access to Other Participating Exchanges by Market Makers.
Pursuant to the Pilot Program, a market-maker may send an order to
another Participating Exchange for execution as a Public Customer
only if the market-maker complies with the following conditions:
(1) the order is an immediate-or-cancel order;
(2) the price of the order is equal to the bid (offer)
disseminated by the Participating Exchange at the time the market-
maker sends an order to sell (buy), and such bid (offer) is equal to
the national best bid (offer) in that series of an Eligible Option
Class, as calculated by the Exchange;
(3) the Exchange's bid (offer) at the time market-maker sends
the order to sell (buy) is not then equal to the national highest
bid (offer) in that series of an Eligible Option Class, as
calculated by the Exchange;
(4) the order is no larger than the Principal Size; and
(5) except with respect to orders a Designated Primary Market-
Maker is sending pursuant to paragraph (c) below, the market-maker
has not received an execution of another such order in the same
series of an Eligible Option Class on the same Participating
Exchange pursuant to the Pilot Program in the previous one minute
period.
(c) Additional Access to Other Participating Exchanges by
Designated Primary Market-Makers. In addition to the access to other
Participating Exchanges provided in paragraph (b) above, a
Designated Primary Market-Maker participating in the Pilot Program
may send an order to another Participating Exchange for execution as
a Public Customer if:
(1) the Designated Primary Market-Makers complies with
subparagraphs (1) through (3) of paragraph (b) above;
(2) the order reflects the same terms as an Underlying Customer
Order the Designated Primary Market-Maker is holding; and
(3) the order is no larger than the Customer Size.
(d) Access to the Exchange by Eligible Market-Makers on Other
Participating Exchanges. Notwithstanding any other Rule of the
Exchange, a Member may send to the Exchange for execution as a
Public Customer Order an order for the account of an EAMM or an
EADPM that complies with the Corresponding Rule of the EAMM's or
EADPM's Participating Exchange.
(e) Order Need Not Be in Writing. Notwithstanding the terms of
Rule 6.24, an Eligible Order need not be in writing.
(f) Implementation of the Pilot Program. The President, or his
designee, may implement the Pilot Program, in whole or in part, with
respect to specific Participating Exchanges, to the extent that any
such Participating Exchange has agreed to implement corresponding
aspects of the Pilot Program. Designated Primary Market-Maker
participation in the Pilot Program shall be voluntary.
(g) This Rule will be in effect on a pilot basis until January
31, 2002.
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
The purpose of this proposed rule change is to implement certain
aspects of an intermarket options linkage on an ``interim'' basis.\4\
This interim linkage would utilize existing systems to facilitate the
sending and receiving of order flow between CBOE market makers and
their counterparts on the other option exchanges as an interim step
towards development of a ``permanent'' linkage.
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\4\ Under the proposal, the interim linkage would be for a pilot
period expiring on January 31, 2002. See Amendment No. 1, supra note
3.
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The Commission has approved a linkage plan that now includes all
five option exchanges.\5\ The option exchanges continue to work towards
implementation of this linkage. However, because the implementation may
take a significant amount of time, the option exchanges have discussed
implementing an ``interim'' linkage. Such a linkage would use the
existing market infrastructure to route orders between market-makers on
the participating exchanges in a more efficient manner.
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\5\ See Securities Exchange Act Release Nos. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000); 43573 (November 16, 2000), 65
FR 70851 (November 28, 2000); and 43574 (November 16, 2000), 65 FR
70850 (November 28, 2000).
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The key component of the interim linkage would be for the
participating exchanges to open their automated customer execution
systems, on a limited basis, to market-maker orders. Specifically,
market-makers would be able to designate certain orders as ``customer''
orders, and thus would receive automatic execution of those orders on
participating exchanges.
This proposed rule would authorize the CBOE to implement bilateral
or multilateral interim arrangements with the other exchanges to
provide for equal access between market makers on our respective
exchanges. The Exchange currently anticipates that the initial
arrangements would allow CBOE Designated Primary Market-Makers
(``DPMs'') and their equivalents on the other exchanges, when they are
holding customer orders, to effectively send those orders to the other
market for execution when the other market has a better quote. Such
orders would be limited in size to the lesser of the size
[[Page 82420]]
of the two markets' automatic execution size for customer orders. The
Exchange expects that the interim linkage may expand to include limited
access for pure principal orders, for orders of no more than 10
contracts.
All interim linkage orders must be ``immediate or cancel'' (that
is, they cannot be placed on an exchange's limit order book), and a
market-maker may send a linkage order only when the other (receiving)
market is displaying the best national bid or offer and the sending
market is displaying an inferior price. This will allow a market-maker
to access the better price for its customer. In addition, if the
interim linkage includes principal orders, it would allow market-makers
to attempt to ``clear'' another market displaying a superior quote. Any
exchange participating in the interim linkage will implement heightened
surveillance procedures to help ensure that their market-makers send
only properly-qualified orders through the linkage.
DPM participation in the interim linkage will be voluntary. Only
when a DPM and its equivalent on another exchange believe that this
form of mutual access would be advantageous will the exchanges employ
the interim linkage procedures. The CBOE believes that the interim
linkage will benefit investors and will provide useful experience that
will help the exchanges in implementing the full linkage.
2. Statutory Basis
The proposed rule change meets the requirement of Section 6(b)(5)
under the Act \6\ in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transaction in
securities, to remove impediments to and perfect the mechanism for a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\6\ 15 U.S.C. 78f(b)(5).
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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
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.
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-00-58 and should
be submitted by January 18, 2001.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33119 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M