Self-Regulatory Organizations; Chicago Board Options Exchange, Inc.; Order Approving Proposed Rule Change To Allow the Chairman of the Equity Floor Procedure Committee, or the Chairman's Designee, To Increase the Eligible Order Size for Entry into RAES

[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Notices]
[Pages 68323-68324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32828]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40736; File No. SR-CBOE-98-37]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change To Allow the Chairman of the 
Equity Floor Procedure Committee, or the Chairman's Designee, To 
Increase the Eligible Order Size for Entry into RAES

December 1, 1998.
    On August 21, 1998, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule change to 
permit the Chairman of the appropriate Floor Procedure Committee 
(``Committee''), or the Chairman's designee, to exercise the authority 
of the Committee to increase the size of orders eligible for entry into 
CBOE's Retail Automatic Execution System (``RAES'') in certain 
circumstances.\2\ The Exchange amended the proposed rule change on 
October 5, 1998.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ RAES accepts, through the Exchange's Order Routing System, 
small public customer market or marketable limit orders for 
automatic execution. An Exchange marketmaker on RAES is assigned as 
the contraparty to these trades.
    \3\ Letter from Timothy H. Thompson, Director, Regulatory 
Affairs, CBOE, to Sonia Patton, Attorney, Division of Market 
Regulation, Commission, dated September 15, 1998 (``Amendment No. 
1'').
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    The proposed rule change was published for comment in the Federal 
Register on October 30, 1998.\4\ The Commission received no comments on 
the proposal. This order approves the proposal, as amended.
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    \4\ See Exchange Act Release No. 40596 (Oct. 23, 1998), 63 FR 
58434 (Oct. 30, 1998).
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Description of the Proposal

    The Exchange is proposing to amend Exchange Rule 6.8, by adding 
Interpretation and Policy .05, to permit the Chairman of the Committee, 
or the Chairman's designee, to exercise the authority of the Committee 
to increase the size of orders eligible for entry into RAES when the 
Chairman or his or her designee believes that the action could 
alleviate a potential backlog of unexecuted orders where an options 
class is experiencing a large influx of orders. This decision may not 
extend for longer than one trading day. If the situation extends into a 
second day, the Chairman or his or her designee would have to make an 
independent decision to increase the RAES eligible order size for that 
subsequent day. The Equity Floor Procedure Committee (``EFPC'') will 
review any decision to approve an increase for consecutive days. 
Pursuant to its discretion under Exchange Rule 6.8, the EFPC has 
established an eligible RAES order size of ten contracts for most 
equity options traded on the floor.
    The EFPC has discovered through experience in overseeing the 
operation of RAES in equity options, however, that it is often 
beneficial to temporarily raise the eligible order size to the 
allowable limit of twenty contracts in situations where a particular 
class of equity options is experiencing a large influx of orders. By 
increasing the eligible order size, a large percentage of the order 
flow can be filled immediately at the Exchange's quotes or at the 
National Best Bid or Offer (``NBBO'').\5\ The Exchange notes that such 
increase will allow the trading crowd to concentrate on filling the 
non-RAES eligible orders in a more expeditious manner.
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    \5\ The Commission recently approved a proposed rule change that 
provides that in classes designated by the EFPC, RAES orders will be 
executed at the NBBO to the extent the NBBO is no more than one tick 
better than the CBOE quote. Exchange Act Release No. 40096 (June 16, 
1998), 63 FR 34209 (June 23, 1998) (approving SR-CBOE-98-13).
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Discussion

    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 and, in 
particular, the requirements of Section 6 of the Act \6\ and the rules 
and regulations

[[Page 68324]]

thereunder.\7\ Section 6(b) of the Act states that the rules of an 
exchange must be designed to facilitate securities transactions and to 
remove impediments to and perfect the mechanism of a free and open 
market. The Commission believes that permitting the Exchange to allow 
the Chairman of the Committee, or the Chairman's designee, to exercise 
the authority of the Committee to determine the size of orders eligible 
for entry into RAES will help to expedite the execution of orders for 
more than 10 contracts, which should free market makers to handle more 
complex or larger orders that are not RAES eligible. The Commission 
believes that EFPC review of decisions to increase the size of orders 
eligible for entry into RAES for consecutive days will help to ensure 
that the Chairman or his or her designee only uses the discretion in 
those limited circumstances set forth in the Interpretation.
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    \6\ 15 U.S.C. 78f(b).
    \7\ In approving this rule change, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation, consistent with Section 3 of the Act. 15 U.S.C. 78c(f).
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Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-98-37) is approved.

    \8\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32828 Filed 12-9-98; 8:45 am]
BILLING CODE 8010-01-M