[Federal Register Volume 64, Number 128 (Tuesday, July 6, 1999)]
[Notices]
[Pages 36414-36415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16949]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41558; File No. SR-CBOE-99-21]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to Changes
to the Firm Quote Rule
June 24, 1999.
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 May 27, 1999, 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
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
CBOE proposes to amend Rule 8.51, Trading Crowd Firm Disseminated
Market Quotes, to expand the categories of orders entitled to firm
quote treatment and to specify to what extent multiple orders entered
by the same beneficial owner at the same time will be entitled to firm
quote treatment. The text of the proposed rule change is available at
the Office of the Secretary, CBOE and at the Commission.
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 Exchange 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 Exchange 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 Exchange proposes to amend Rule 8.51 to expand the categories
of orders entitled to firm quote protection and to specify to what
extent multiple orders entered by the same beneficial owner and
represented at a trading station at approximately the same time will be
entitled to firm quote protection.
Currently, Rule 8.51(a) states that ``non-broker-dealer customer''
orders up to the specified size (currently 10 contracts) are entitled
to be executed at the offer (bid) which is displayed when a buy (sell)
customer reaches the trading station where the particular option class
is located for trading.\3\ The Exchange is proposing to expand the
category of orders entitled to this protection such that, with one
exception, all orders would be entitled to the firm quote treatment
under Rule 8.51(a). The firm quote requirement would not apply to
orders of individuals who trade in the account of a market-maker or
specialist on the Exchange or on another exchange, which account is
exempt from the provisions of Regulation T of the Board of Governors of
the Federal Reserve System pursuant to Section 7(c)(2) of the Act.\4\
This exception would exclude not only market-maker accounts but also
customer accounts of market-makers or specialists. In other words, the
proposal would apply to orders of broker-dealers (other than those
acting as market-makers) regardless of whether they are agency or
proprietary orders. The appropriate Floor Procedure Committee would
have the authority to determine not to extend firm quote treatment to
broker-dealer orders in a particular class of options under its
jurisdiction.
---------------------------------------------------------------------------
\3\But see Securities Exchange Act Release No. 40957 (January
20, 1999), 64 FR 4485 (January 28, 1999) (File No. SR-CBOE-98-53,
proposing to raise the number of contracts guaranteed under the firm
quote rule to the RAES contract limit).
\4\ Section 7(c)(2) of the Act specifies those categories of
persons that are exempt from the requirements of Regulation T with
respect to the arrangement, extension or maintenance of credit to
finance securities transactions. Among those persons exempted are
members of national securities exchanges or registered broker-
dealers who arrange or maintain credit to finance their activities
as market makers.
---------------------------------------------------------------------------
In proposing this change, the Exchange believes that extending the
firm quote treatment to broker-dealer orders will provide an incentive
to broker-dealers to send their orders to the Exchange because they
will be assured that their order will be executed at the
[[Page 36415]]
displayed bid or offer, as appropriate. Currently, CBOE trading crowds
and specialists or crowds on other exchanges have the option to trade a
broker-dealer order at the displayed quote or to change the displayed
bid (offer) to reflect that the previously displayed bid (offer) is no
longer available. This ``trade or fade'' policy is codified in
paragraph (b) of Rule 8.51.
The Exchange is also proposing to amend Rule 8.51 to deny the firm
quote protection to those orders or portions of orders for the same
class of options (whether for the same or different series) that are
entered by the same beneficial owner and that are represented at the
trading station at approximately the same time and that cumulatively
exceed the firm quote requirement for that particular class of options.
For example, assume the firm quote requirement in option ABC is ten
contracts and that a broker-dealer simultaneously sends orders to the
floor broker in a crowd to by ten at-the-money call options in each of
three different series for that class ABC. The floor broker will likely
represent each of these three orders one after another. Under the
proposed new paragraph (a)(3) of Rule 8.51, only the first of these
three orders would be entitled to firm quote protection. The crowd
would be required to trade the other two ten lot orders at the
displayed market or to change that market pursuant to the terms of the
``trade or fade'' policy set forth in paragraph (b) of the Rule.
The Exchange believes that customers or broker-dealers can attempt
to circumvent the limits of the firm quote protection by submitting
orders at the same time that are in many respects economically very
similar. If the market-makers in a crowd were required to fill each of
these orders at the displayed quotes without the possibility of
refreshing those quotes they would essentially be responsible for
honoring the displayed quotes in the crowd at a level beyond the
intended protection and would be subjected to undue risk. The potential
risk will be even greater than it is today with the expansion in the
category of orders that will be entitled to firm quote protection. In
addition, the potential risk will be increased if the firm quote limit
were to be raised. The Exchange recently submitted a filing with the
Commission proposing to expand the allowable firm quote limit up to 50
contracts. The Exchange believes that providing for limits on the
extension of the firm quote protection in cases where multiple orders
for the same class of options are submitted at approximately the same
time is the best way to ensure the viability of the expansion of the
firm quote protection that the Exchange has proposed in both this
filing (with respect to an expansion in the category of orders entitled
to the firm quote guarantee) and in SR-CBOE-98-53 (with respect to an
expansion in the allowable firm quote contract limit).
The Exchange also proposes to amend paragraph (b) of Rule 8.51 and
Interpretation .06 to make them consistent with the change in the
categories of orders now subject to the firm quote guarantee.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b)(5) of the Act \5\ in
that it is designed to remove impediments to a free and open market and
protecting investors and the public interest.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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 the 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 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-99-21 and
should be submitted by July 27, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
---------------------------------------------------------------------------
\6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-16949 Filed 7-2-99; 8:45 am]
BILLING CODE 8010-01-M
