[Federal Register Volume 60, Number 206 (Wednesday, October 25, 1995)]
[Notices]
[Pages 54737-54739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26428]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36391; File No. SR-CBOE-95-52]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
the Suspension of the Ten Contract Firm Quote Requirement During Fast
Markets
October 18, 1995.
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 September 5, 1995, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``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
The Exchange proposes to amend CBOE Rules 8.51, 6.6 and 6.20
Interpretation .09 to: (i) remove the pilot status of Rule 8.51; (ii)
conform Rule 8.51 to the existing practice of permitting, but not
requiring, Floor Officials to suspend the ten contract firm quote
requirement of Rule 8.51(a) during a fast market; (iii) expand the
group of persons with authority to grant suspensions, exemptions or
exceptions to Rule 8.51 (currently only the Market Performance
Committee) to any two Floor Officials; (iv) specify that when a fast
market is declared any two Floor Officials have the power to suspend
the firm quote requirement of Rule 8.51 and turn off the Retail
Automatic Execution System (``RAES''); (v) allow the senior person then
in charge of the Exchange's Control Room to suspend the ten contract
firm quote requirement under certain circumstances; and (vi) amend Rule
6.20 Interpretation .09 to clarify the instances where a member of the
Market Performance Committee may perform the functions of a Floor
Official. The text of the proposed rule change is available at the
Office of the Secretary, the Exchange, 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. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Section (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
The purposes of the proposed rules changes are: (1) to approve Rule
8.51 on a permanent basis, removing the current pilot program
designation, (2) to conform Rule 8.51 to the existing practice of
permitting, but not requiring, Floor Officials to suspend the ten
contract firm quote requirement of Rule 8.51(a) during a fast market,
(3) to expand the group of persons with authority to grant suspensions,
exemptions, or exceptions to the firm quote requirement from the Market
Performance Commission members to any two Floor Officials, (4) to
specify that when a fast market is declared pursuant to Rule 6.6, two
Floor Officials have the power to suspend the firm quote requirement of
Rule 8.51 and turn off RAES, (5) grant the senior person then in charge
of the Exchange's Control Room the authority to suspend the ten
contract firm quote requirement, if there is a system malfunction that
affects the Exchange's ability to disseminate or update market quotes,
and (6) to amend Rule 6.20 Interpretation .09 to clarify that the
instances where a member of the Market Performance Committee may
perform the functions of a Floor Official include enforcing policies
and acting pursuant to rules related to RAES, fast markets, and the ten
contract firm quote requirement.
Rule 8.51(a) requires a trading crowd to sell (buy) at least ten
contracts at the offer (bid) which is displayed when a buy (sell)
customer order reaches the trading crowd. Initially, this rule was
adopted as an Exchange pilot program to be monitored and enforced by
the Exchange's Market Performance Committee.\3\ The rule has been in
effect since 1989, and the Exchange believes it is now time to remove
the designation as a pilot program. The Exchange believes that the rule
has been beneficial to investors and has provided greater liquidity to
the markets by requiring that the orders of non-broker dealer customers
be filled for at least ten contracts at the displayed quote price.
\3\See Securities Exchange Act Release No. 26924 (June 13,
1989), 54 FR 26284 (June 22, 1989).
---------------------------------------------------------------------------
Rule 8.51(a)(2) currently provides that the ten contract firm quote
requirement will be in effect unless a fast market has been declared.
Although not presently explicit in the rules, it is current practice
not to automatically suspend this requirement when a fast market has
been declared. Instead, pursuant to Rule 8.51(a)(3), when a fast market
has been declared, Market Performance Committee members determine
whether the ten contract firm quote requirement in paragraph (a) of
Rule 8.51 should be suspended. The proposed amendment would amend Rule
8.51(a)(2) and add Interpretation .07 to clarify that the ten contract
firm quote requirement in paragraph (a) of Rule 8.51 is not
automatically suspended when a fast market is declared. Instead,
Interpretation .07 would provide that any two Floor Officials have the
power, but are not required, to suspend this requirement when a fast
market has been declared.
CBOE believes the interests of a fair and orderly market are better
served when the rules allow Exchange officials the discretion to
evaluate market conditions and circumstances and to exercise their
judgment as to whether the ten contract firm quote requirement should
be suspended in a fast market. This permits the firm quote requirement
to remain in place for the benefit of non-broker dealer customers even
when a fast market has been declared, except in those specific
instances where two Floor Officials have determined that the ten
contract firm quote requirement should be suspended.
As set forth in Interpretation .09 to Rule 6.20, members of the
Market Performance Committee may perform the functions of Floor
Officials for the purpose of enforcing trading conduct policies. As
Rule 8.51 is presently written, only the Market Performance Committee
or Market Performance Committee members acting as Floor Officials may
grant exemptions or make exceptions to Rule 8.51. CBOE believes
[[Page 54738]]
Floor Officials from the Floor Officials Committee are also qualified
to make decisions regarding exemptions and exceptions to Rule 8.51.
CBOE sees no reason to limit this power to members of the Market
Performance Committee. CBOE also believes that the power to suspend
Rule 8.51 once a fast market is declared should be granted to any two
Floor Officials, whether they are members of the Market Performance
Committee or members of the Floor Officials Committee.
CBOE's proposal would grant equal power to members of the Floor
Officials Committee and members of the Market Performance Committee to
act under Rule 8.51 regarding suspensions, exceptions or exemptions to
the firm quote requirement. It is important for a timely decision to be
made once a fast market has been declared or other situations have
arisen which warrant the suspension of the firm quote requirement, or
an exemption or exception to this requirement. CBOE believes that it
could be detrimental to a fair and orderly market to delay action until
a member of the Market Performance Committee could be found to make
such a decision when members of the Floor Officials Committee might
already be present at the trading post. To implement CBOE's intention
that any two Floor Officials may make decisions under Rule 8.51,
including members of the Market Performance Committee acting as Floor
Officials and members of the Floor Officials Committee, the proposal
would amend Rule 6.20, Interpretation .09, amend Rule 8.51(a)(3), and
add Interpretation .06 to Rule 8.51. In addition, the proposal would
amend Rule 8.51 to clarify that in deciding whether to grant a
suspension, exception or exemption to the firm quote requirement, Floor
Officials consider whether to do so would be in the interest of a fair
and orderly market.
Because Rule 8.51 requires that Exchange market makers honor non-
broker dealer customer orders at the displayed quote for up to ten
contracts, it is important that the displayed market quote be accurate.
Otherwise, market makers would be forced to trade ten contracts at an
inaccurate or ``stale'' quote price. Therefore, if there is a system
malfunction or other circumstance which interferes with the Exchange's
ability to disseminate the then current and accurate quote, it is
important for the Exchange to be able to act quickly to suspend the
market maker's obligations under Rule 8.51 until the difficulty is
resolved. To implement such a quick response, the proposal would
further amend Rule 8.51 to grant to the senior person then in charge of
the Exchange's Control Room the authority to suspend the ten contract
firm quote requirement contained in Rule 8.51(a) if there is a system
malfunction or other circumstance that affects the Exchange's ability
to disseminate or update market quotes. After exercising such
authority, the senior person would need immediately to seek approval of
two Floor Officials, who would be empowered to confirm or overrule the
suspension.
It is important for the Control Room to have this power to suspend
the firm quote requirement, since the Control Room would most likely
learn of the system malfunction or other circumstance before Floor
Officials or other Exchange staff. Consequently, the Control Room could
act in a timely manner to prevent market makers from having to trade at
``stale'' market quotes. If the Control Room does invoke its power to
suspend the firm quote requirement, then the Control Room would
disseminate a message notifying the public that the displayed quotes
are not firm because of a data dissemination problem. This would inform
non-broker dealer customers that their orders would not necessarily be
filled at that displayed bid or offer. Once the system malfunction has
been corrected and the market quotes have been updated, either the
senior person then in charge of the Exchange's Control Room or two
Floor Officials would be required to end the suspension of the firm
quote requirement.
As it is presently written, Rule 6.6(b) provides that the two Floor
Officials declaring a fast market have the power to take a number of
specified actions and more generally to take such other actions as are
deemed necessary in the interest of maintaining a fair and orderly
market. When a fast market has been declared, pursuant to these general
powers, Floor Officials will often, in the interest of maintaining a
fair and orderly market, suspend the ten contract firm quote
requirement of Rule 8.51. This decision to suspend the firm quote
requirement is made often during a fast market because the displayed
quote is not current or accurate due to the influx of orders or other
unusual circumstances. Therefore, market makers should not be forced to
trade ten contracts at an inaccurate quote. In order to notify members
and the public that, during a fast market, Floor Officials may suspend
the firm quote requirement, CBOE proposes to specify in Rule 6.6(b)
that when a fast market is declared, Floor Officials have the power to
suspend the ten contract firm quote requirement of Rule 8.51.
For the same reasons, after a fast market declaration, another
action Floor Officials may take in the interest of maintaining a fair
and orderly market is to turn off RAES. When RAES receives an order,
the system automatically will attach to the order its execution price,
determined by the prevailing market quote at the time of the order's
entry into the system. A buy order will pay the prevailing market quote
for an offer and a sell order will sell at the prevailing market quote
for the bid. A market maker who has signed on as a participant in RAES
will be designated as a contra-broker on the trade. Trades are assigned
to these participating market makers on a rotating basis. Therefore, by
agreeing to participate in RAES, a market maker is automatically
assigned trades based on the prevailing market quote that is then being
disseminated. Consequently, it is important for the prevailing market
quote to be accurate, because otherwise market makers participating in
RAES may be assigned trades at prices other than the actual prevailing
market quote. During a fast market, often the influx of orders is
greatly increased or other unusual circumstances exist that affect the
accuracy of the prevailing market quote. For this reason, Floor
Officials, acting under the general powers of Rule 6.6(b), may turn off
RAES to prevent market makers from being assigned trades based on
inaccurate market quotes. In order to notify members and the public
that such action may be taken in a fast market, CBOE proposes to amend
Rule 6.6 to specify that Floor Officials have the power to turn off
RAES after a fast market has been declared.
Furthermore, as Rule 6.6(b) is presently written, it could be
interpreted that only the same two Floor Officials who declared the
fast market have the power to take the other actions specified in Rule
6.6(b). CBOE's practice has been that any two Floor Officials have the
powers specified in Rule 6.6(b), not just the specific two individuals
who declared the fast market. Therefore, CBOE proposes an amendment to
Rule 6.6(b) to clarify that any two Floor Officials have the powers
specified in 6.6(b).
CBOE believes that members of the Market Performance Committee, who
perform Floor Officials functions, as well as Floor Officials who are
members of the Floor Officials Committee, are equally qualified to make
decisions regarding Rule 6.6. To clarify that members of the Market
Performance Committee may also act pursuant to Rule 6.6, the proposal
would amend Rule 6.20 Interpretation .09 to specify
[[Page 54739]]
that the Floor Official functions that Market Performance Committee
members may perform include acting pursuant to rules related to fast
markets and RAES. Again, when circumstances arise which might require
the declaration of a fast market, it is important for timely decisions
to be made regarding the declaration of a fast market and other related
decisions specified in Rule 6.6. CBOE believes that it could be
detrimental to a fair and orderly market to delay action until a Floor
Official from the Floor Officials Committee is found to make such
decisions when members of the Market Performance Committee might
already be present at the trading post.
The Exchange believes that the proposed rule changes are consistent
with and further the objectives of Section 6(b)(5) of the Act, in that
the rule changes are designed to perfect the mechanisms of a free and
open market and to protect investors and the public interest by
enabling any two Floor Officials to evaluate and consider market
conditions and circumstances in determining whether to suspend the firm
quote requirement of Rule 8.51 during a fast market. The proposed rule
changes clarifying the powers of Market Performance Committee members
and specifying the powers Floor Officials may invoke during a fast
market are also consistent with and further the objectives of Section
6(b)(5) of the Act, in that they too are designed to perfect the
mechanism of a free and open market and to protect investors and the
public interest. The proposed rule change regarding the authority of
the Control Room to suspend the firm quote requirement when there has
been a system malfunction affecting the dissemination or updating of
quotes is also consistent with and furthers the objectives of Section
6(b)(5) of the Act, in that the change is designed to perfect the
mechanism of a free and open market.
The Exchange also believes that the proposed rule changes,
collectively, are consistent with Section 6(b) of the Act in general
and furthers the objectives of Section 6(b)(5) in particular in that
they are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of change, 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.
(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 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the CBOE. All
submissions should refer to SR-CBOE-95-52 and should be submitted by
November 15, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
\4\17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26428 Filed 10-24-95; 8:45 am]
BILLING CODE 8010-01-M
