# Self-Regulatory Organizations; Order Granting Accelerated Approval of a Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to the Dissemination of Options Quotations With Size
**I. Introduction**
On December 28, 2001, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) submitted to the Securities and Exchange Commission (“Commission” or “SEC”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [^1] and Rule 19b-4 thereunder, [^2] a proposed rule change to amend CBOE Rules 6.8 and 8.51 to accommodate the introduction of an options quotation with size (“quotes with size” or “QWS”) system with an automatic decrementation feature (“AutoDec”). On January 14, February 27, and March 1, 2002, respectively, the Exchange submitted Amendment Nos. 1, 2, and 3 to the proposal. [^3] Notice of the proposed rule change, as amended, appeared in the *Federal Register* on March 8, 2002. [^4] The Commission received no comments on the proposal. This order approves the proposed rule change, as amended, on an accelerated basis.
[^1] 15 U.S.C. 78s(b)(1).
[^2] 17 CFR 240.19b-4.
[^3]*See* letters from Edward J. Joyce, President and Chief Operating Officer, CBOE, to Deborah Flynn, Division of Market Regulation (“Division”), SEC, dated January 11, 2002 (“Amendment No. 1”); Steve Youhn, CBOE, to Deborah Flynn, Division, SEC, dated February 13, 2002 (“Amendment No. 2”); and Steve Youhn, CBOE, to Deborah Flynn, Division, SEC, dated February 28, 2002 (“Amendment No. 3”).
[^4]*See* Securities Exchange Act Release No. 45490 (March 1, 2002), 64 FR 25091.
[^5] For those series in which the Exchange does not implement the QWS system, the Exchange would continue to publish firm quote sizes on its website. *See* CBOE Rule 8.51(c)(2).
**II. Description of the Proposal**
The CBOE proposes to implement a QWS system with an AutoDec feature that would enable the Exchange to disseminate options quotations with a size that reflects previous executions. The Exchange proposes to implement the QWS system gradually on a series-by-series basis. [^5]
**AutoDec**
For those series in which the exchange disseminates options quotations with size, the QWS system would automatically decrement all executions for each individual series calculated by Autoquote [^6] that execute automatically. For example, if the Exchange disseminates a size of 100 contracts, the trading crowd would be firm for 100 non-broker-dealer contracts executed automatically or via open outcry [^7] at the disseminated price, until that size was exhausted or until the quote was refreshed. Under the proposal, the appropriate Floor Procedure Committee (“FPC”) would retain its authority to establish the eligible order size permitted to be sent to RAES for a particular series at a number less than the disseminated size. Therefore, for classes in which the Exchange does not disseminate options quotations with size, CBOE Rule 6.8(c)(v) would remain in effect. [^8]
[^6] For purposes of this rule filing, Autoquote shall refer to any automated quotation updating system, whether Exchange-owned or proprietary.
[^7] The Commission's Quote Rule obligates the responsible broker or dealer to also be firm for the disseminated size for orders executed in open outcry. Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1.
[^8] CBOE Rule 6.8(c)(v) provides that the appropriate FPC shall determine the size of orders eligible for entry into RAES. The eligible order size for non-QWS series must be 100 contracts or less.
While the disseminated size would reflect the number of contracts that may be executed automatically or via open outcry at a particular price, trades executed in open outcry would *not* cause the disseminated size to decrement automatically. Under these circumstances, the Exchange would be firm for executions that in the aggregate sum up to more than its disseminated size. The number of contracts in a particular series that may receive automatic execution at the disseminated price, however, may not exceed the disseminated size. [^9]
[^9]*See* proposed CBOE Rule 6.8.09(a)(1). Notwithstanding this provision, all orders rerouted from Live Ammo back to RAES would receive an automatic execution at the disseminated price even if the cumulative size of such rerouted orders exceeds the disseminated size. *See* proposed CBOE Rule 6.8.09(a)(2). *See also infra* note 13 .
Consistent with the current provisions of CBOE Rule 6.8, orders eligible for automatic execution would not be executed automatically at prices inferior to the national best bid or offer. If an incoming electronic order exceeds the disseminated size, that order would receive a partial automatic execution for up to the disseminated size at the disseminated price. The balance of the order would be automatically routed away from RAES to the Exchange's Public Automated Routing System (“PAR”), the Exchange's Booth Automated Routing Terminal (“BART”), or Live Ammo [^10] and thus may receive a dual-price execution. [^11]
**30-Second Reroute Period**
[^10] The Live Ammo electronic screen displays market orders or limit orders that improve the market. See CBOE Rule 7.4(g).
[^11] Orders would route to BART only if a firm so chooses.
When the disseminated size is decremented to zero by automatic executions, for a period not to exceed 30-seconds (“reroute period”), all subsequent orders in that series that are otherwise eligible for RAES would be automatically routed away from RAES to either PAR, BART, or Live Ammo. [^12] During the reroute period, the Exchange would disseminate a size of “1” with the same price. Upon expiration of the reroute period timer, new electronic orders would be eligible for automatic execution up to the refreshed disseminated size. The duration of the reroute period would be configurable by the DPM on a class basis and may not exceed 30-seconds. The appropriate FPC may, however, establish a ceiling on that duration not to exceed thirty seconds. The DPM may manually override the reroute period timer by submitting a new quote prior to the expiration of the reroute period. For example, if the reroute period timer is established at 15-seconds, the DPM may manually send a new quote at any time prior to the expiration of the 15-second reroute period, thereby allowing orders to be eligible for automatic execution at the refreshed price.
[^12] Orders received during the reroute period would not be held for the duration of the reroute period. Rather, as incoming electronic orders are received during the reroute period they would be sent upon receipt either to PAR, BART, or Live Ammo. The appropriate FPC shall determine by class the location to which to route those RAES orders that are submitted during the reroute period.
Upon expiration of the reroute period, subsequent incoming orders that are eligible for automatic execution would be eligible to receive automatic execution at the refreshed price. [^13]
[^13] The Live Ammo terminals feature a “Live Ammo to RAES” switch that enables the DPM to automatically reroute orders back to RAES for automatic execution. If the DPM uses this function, all orders on Live Ammo would then immediately reroute for automatic execution, even if the cumulative size of these orders exceeds the disseminated size. Orders rerouted from Live Ammo to RAES would retain priority over subsequently received RAES orders. *See* proposed CBOE Rule 6.8.09(a)(2).
**RAES Operation**
To facilitate the introduction of QWS, the Exchange proposes to make a corresponding change to CBOE Rule 6.8(c)(v) regarding the maximum eligible order size for RAES orders. Currently, the maximum allowable RAES size is 100 contracts. The Exchange proposes to retain this upper limit, however, it would only apply to those series in which the Exchange does not disseminate options quotations with size (as defined in Proposed CBOE Rule 6.8(b)(iv)). For those series in which the Exchange disseminates options quotations with size, the eligible order size would be established by the appropriate FPC.
**Determination of Disseminated Size**
The CBOE proposes that the entity that has responsibility under Exchange Rules to determine a formula for generating automatically updated market quotations would also be responsible for determining the size of the undecremented disseminated quote. According to the CBOE, this entity, in most instances, would either be the DPM, Lead Market-Maker (“LMM”), or Supplemental Market-Maker (“SMM”) or Appointed Market-Maker (“Appointed Market-Maker”) for the class. [^14]
[^14] For those classes in which a DPM, LMM, SMM, or Appointed Market-Maker does not have responsibility to determine a formula for generating automatically updated market quotations, the obligation to update quotes is imposed upon the trading crowd as a whole.
While DPMs, LMMs, SMMs, and Appointed Market-Makers have the responsibility to determine the size of the undecremented disseminated quote, the proposed amendment to Interpretation and Policy .09(c) of CBOE Rule 6.8 expressly provides that the DPM, LMM, SMM, or Appointed Market-Maker may, but is not required to, consult with and/or agree with other market makers in the trading crowd in determining the size of the undecremented disseminated quote. The CBOE further proposes that the members of the trading crowd, however, may, but are not required to, provide the DPM, LMM, SMM, or Appointed Market-Maker with any input regarding the size of the undecremented disseminated quote. In those classes in which a DPM, LMM, SMM, or Appointed Market-Maker does not have responsibility to determine the Autoquote variables, the trading crowd as a whole shall determine the size of the undecremented disseminated quote.
**Replenishment Timer**
According to the Exchange, because of the preponderance of series for which each DPM is responsible for maintaining quotes, the CBOE proposes to introduce a replenishment timer to automatically update the dissemination of size values. The replenishment timer, which would be configurable by class by the DPM, would be a feature that automatically increases the disseminated size for a particular series back to the original Autoquote volume parameter after a set time-period when no further decrementation has occurred. [^15]
[^15] For example, assume the replenishment timer is set for 240-seconds in a class with a disseminated size of 200 and that this particular series has been decremented to 40 contracts due to executions. In order to prevent the continued dissemination of 40 contracts for an extended period, the replenishment timer would, after 240-seconds from the last execution, increase the disseminated size back to 200 contracts. The firm quote size would once again be 200 contracts. The replenishment timer is incorporated in proposed CBOE Rule 8.51(c)(2)(b).
**III. Commission's Findings and Order Granting Accelerated Approval of the Proposed Rule Change**
After careful review, 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. [^16] In particular, the Commission believes that the proposal to allow automatic decrementation of disseminated size to reflect automatic executions at the disseminated price is consistent with Section 6(b)(5), [^17] in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. Specifically, the Exchange's ability to automatically decrement its disseminated size based on automatic executions through RAES should enable CBOE members to more accurately reflect their liquidity and provide all market participants, including investors, with a more accurate measure of the liquidity available in CBOE's market at the disseminated price.
[^16] In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
[^17] 15 U.S.C. 78f(b)(5).
While DPMs, LMMs, SMMs, and Appointed Market-Makers have the responsibility to determine the size of the undecremented disseminated quote, the proposal would permit the DPM, LMM, SMM, or Appointed Market-Maker to consult with and/or agree with other market makers in the trading crowd in determining the size of the undecremented disseminated quote. The proposal would further allow that the members of the trading crowd may, but are not required to, provide the DPM, LMM, SMM, or Appointed Market-Maker with any input regarding the size of the undecremented disseminated quote. At this time, the Commission believes it is reasonable for the Exchange's rules to permit the members of the crowd to be given a voice in setting the size associated with the Autoquote price because, pursuant to the Exchange's rules, they will be obligated to execute orders at that size.
The Commission notes that to the extent the CBOE no longer establishes by rule and periodically publishes quotation sizes pursuant to Rule 11Ac1-1(d)(1) under the Act, its members that are responsible broker or dealers, likewise, may no longer rely on the exception to the Quote Rule that currently relieves them of their obligation pursuant to paragraph (c)(1) to Rule 11Ac1-1 to communicate to the Exchange the sizes associated with their quotations. In addition, such responsible brokers or dealers may no longer comply with its obligations under paragraph (c)(2) to Rule 11Ac1-1 by executing orders up to the size established by Exchange rule and must, instead, execute any order in any amount up to its published quotation size.
Pursuant to Section 19(b)(2), [^18] the Commission finds good cause for approving the proposed rule change, as amended, prior to the 30th day after the date of publication of notice thereof in the *Federal Register* . The Commission notes that the proposed rule change was published for comment and that no comment letters were received. The Commission believes that granting accelerated approval to the proposed rule change should allow the CBOE begin to implement, without delay, its QWS system with AutoDec, which should enhance the transparency of the CBOE market.
[^18] 15 U.S.C. 78s(b)(2).
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, [^19] that the proposed rule change (SR-CBOE-2001-70) is approved, as amended, on an accelerated basis.
[^19] 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority. [^20]
[^20] 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.