Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Chicago Board Options Exchange, Inc. and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule Change, To Allow Certain Orders Entered Through the Exchange's Order Routing System To Automatically Trade Against Orders in the Exchange's Customer Limit Order Book

I. Introduction

On November 13, 2000, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”), filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, a proposed rule change to allow certain orders entered through the Exchange's Order Routing System (“ORS”) to automatically trade against orders in the Exchange's customer limit order book. The proposed rule change was published in the Federal Register on June 4, 2001. The Commission received one letter and one e-mail, submitted by the same commenter, regarding the proposed rule change. On October 1, 2001, the Exchange filed Amendment No. 1 to the proposed rule change.

This order approves the proposed rule change, accelerates approval of Amendment No. 1, and solicits comments from interested persons on the amendment.

II. Description of the Proposed Rule Change

The CBOE's Automated Book Priority System (“ABP”) allows an order entered into the Exchange's Retail Automatic Execution System (“RAES”) to trade directly with an order on the Exchange's customer limit order book when the best bid (offer) on the Exchange's book is equal to the prevailing market bid (offer). However, orders entered into the RAES system are subject to size limitations. The Exchange now proposes to expand the application of the ABP system to allow booked orders to trade directly with incoming marketable public customer orders routed through ORS which, because of their larger size, are ineligible for RAES.

Currently, when a non-RAES eligible order is entered into the Exchange's ORS and the best bid (offer on the Exchange's book is equal to the prevailing market bid (offer), the order is routed to a Floor Broker's terminal, a work station in the crowd, or the order-sending firm's booth. CBOE submits that this helps ensure that such orders are handled and executed in a manner consistent with CBOE Rule 6.45, which provides that bids or offers displayed on the customer limit order book are entitled to priority over other bids or offers at the same price. However, CBOE states that once an order is so routed, it becomes subject to market risk, as there may be some delay between the time the order is rerouted and the time it is actually filled in open outcry. CBOE believes that in times of extreme market volatility this delay could have a significant effect on the price at which the order is executed.

Under the proposal, an incoming marketable public customer ORS order would be automatically executed against a customer limit order in the book that represents or equals the prevailing best bid (offer) up to the size of that booked order. Any remaining balance of the ORS order would then be instantly rerouted through the ORS as if it were a new order, which could, among other things, include handling under CBOE's RAES Rule (Rule 6.8). The proposed rule change also provides that no automatic execution would take place at a price inferior to the current best bid (offer) in any other market.

The proposed change would be contained in proposed new Rule 6.8.B. The new rule would further provide that the appropriate Floor Procedure Committee (“FPC”) could determine which option classes would be subject to the rule. Furthermore, the proposed rule would allow two Floor Officials, the FPC Chairman, or the Chairman's designee to exempt an option class or classes from the proposed rule's requirements if warranted by unusual market conditions.

III. Summary of Comments

The one commenter who expressed views on the proposed rule change generally supported the proposal. However, the commenter expressed concern that the proposal would not be implemented in all classes of CBOE-listed options, but only as determined by the appropriate FPC. The commenter submitted that ABP should be engaged for all classes of options, rather than implemented on a selective basis.

IV. Discussion

The proposal would extend CBOE's ABP system to marketable public customer orders entered into the Exchange's ORS, on a class-by-class basis. The Commission believes that this expansion of the ABP system should benefit customers using the ORS system, as well as customer whose orders are residing in the Exchange's book, because these orders would be subject to quicker executions. 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. In particular, the Commission believes that the proposal is consistent with Section 6(b)(5) of the Act, 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.

V. Amendment No. 1

The Commission further finds good cause to approve Amendment No. 1 to the proposed rule change prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. In Amendment No. 1, the Exchange clarified that the Chairman of the appropriate FPC may designate his authority to exempt an option class from the provisions of paragraph (a) of the proposed rule during unusual market condition only to another member of the FPC. The Commission notes that Amendment No. 1 merely clarified who is eligible to be the “Chairman's designee” for purposes of the proposed rule. Accordingly, the Commission believes that there is good cause, consistent with Sections 6(b)(5) and 19(b) of the Act. to approve Amendment No. 1 on an accelerated basis.

VI. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning Amendment No. 1, including whether Amendment No. 1 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 at the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-CBOE-00-56 and should be submitted by February 1, 2002.

VII. Conclusion

For the foregoing reasons, the Commission finds that CBOE's proposal to amend its rules to allow for certain orders entered through the Exchange's Order Routing System to automatically trade against orders in the Exchange's customer limit order book, as amended, is consistent with the requirements of the Act and rules and regulations thereunder.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-CBOE-00-56), as amended, is approved.