[Federal Register Volume 59, Number 208 (Friday, October 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26765]
[Federal Register: October 28, 1994]
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POSTAL RATE COMMISSION
[Release No. 34-34876; File No. SR-CBOE-94-17]
Self Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 to a Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 2 to a
Proposed Rule Change by the Chicago Board Options Exchange, Inc.
Relating to Firm Quote Responsibilities
October 21, 1994.
I. Introduction
On June 7, 1994, 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\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to increase from 10 to 100 the firm quote contract
size minimum applicable to Designated Primary Market Makers (``DPMs'')
in classes of interest rate options for which Public Automated Routing
System (``PAR'') workstations are available. On June 17, 1994, the CBOE
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule
change, as amended, was published for comment in the Federal Register
on July 1, 1994.\4\ No comments were received on the proposed rule
change. The Exchange filed Amendment No. 2 to the proposed rule change
on September 22, 1994.\5\ This order approves the proposal, as amended.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\In Amendment No. 1, the CBOE states that the reference to
``public customer orders'' in its proposal is synonymous with, and
should be understood to mean, ``non-broker-dealer customer orders.''
In addition, Amendment No. 1 states that the phrase ``public
customer'' in Exhibit A to the CBOE's filing should read ``non-
broker-dealer customer,'' thereby making the phraseology consistent
with the language used in CBOE Rule 8.51. See Letter from Dan W.
Schneider, Schiff Hardin & Waite, to Thomas McManus, Division of
Market Regulation, Commission, dated June 16, 1994 (``Amendment No.
1'').
\4\See Securities Exchange Act Release No. 34262 (June 27,
1994), 59 FR 33991.
\5\In Amendment No. 2, the CBOE revises its proposed Regulatory
Circular to clarify that it is the introduction of the PAR
workstation in combination with the existing Autoquote System that
enables a DPM to revise automatically his market in 100 lot sizes
without undue risk. Thus, the revised proposed Regulatory Circular
introduces an explicit reference to the CBOE's Autoquote System. See
letter from Michael L. Meyer, Schiff Hardin & Waite, to Fancois
Mazur, Attorney Division of Market Regulation, Commission, dated
September 22, 1994 (``Amendment No. 2''). In addition, Amendment No.
2 states that currently there are seven PAR workstations installed
at the CBOE: one assigned to the DPM at the post where 30-year bond
interest rate options are traded; and six assigned to floor brokers
at various posts. No additional DPMs currently are scheduled to
receive PAR workstations. Id.
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II. Description of Proposal
The CBOE proposes to require DPMs using PAR workstations to provide
firm quotes of up to 100 contracts on interest rate options for non-
broker-dealer customer orders. This quote size minimum is substantially
higher than the 10 contract minimum otherwise applicable to DPMs under
CBOE Rule 8.51 and prior Regulatory Circulars.\6\ The 100 contract
minimum will be operative initially only in 30-year bond interest rate
options, since this is the first class for which a PAR workstation will
be assigned. The Exchange expects that the 100-contract minimum will be
extended gradually to other classes of interest rate options, as the
use of PAR workstations expands to these classes. The CBOE will issue a
Regulatory Circular describing the details of its proposal.\7\
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\6\The applicability of CBOE Rule 8.51 to DPMs is provided for
in Regulatory Circular 93-31 (May 7, 1993). Prior to the issuance of
Regulatory Circular 93-31, the CBOE required DPMs to assure that
each disseminated market quotation in all expiration months for all
appointed option classes be honored up to five contracts, both for
broker-dealer and non-broker-dealer customer orders. See CBOE Rule
8.80(c)(2). Pursuant to Regulatory Circular 93-31, DPMs became
obligated to ensure that the disseminated market quotation be firm
for the two near-term expiration series for up to ten contracts for
non-broker-dealer customer orders only. See Regulatory Circular 93-
31, Thus, DPMs became subject to the same, less stringent,
obligations of the trading crowds adopted in July 1989 in the floor-
wide firm quote rule. See CBOE Rule 8.51(b).
\7\See Exhibit A, SR-CBOE-94-17; and Amendment Nos. 1 and 2
supra notes 3 & 5, respectively.
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The Exchange believes that this change in DPM quote commitment
levels will enhance the depth and liquidity of its markets in interest
rate options. Currently, much of the trading in interest rate
derivatives is done in markets where quoted or negotiated prices can be
obtained in transaction sizes larger than is guaranteed at the CBOE.
The Exchange believes that increasing the firm quote size minimum
should enable it to compete more effectively for order flow and trading
activity in interest rate options.
The Exchange also believes that the DPMs affected by the rule
change will be able to meet the higher commitment levels without
incurring undue financial risk because of the inherent efficiencies of
the PAR workstations combined with the efficiencies already existing
with respect to the Exchange's Autoquote System.\8\ A PAR workstation
is a newly-developed, automated, computer-based workstation that
provides users with the ability to execute trades, transmit trade
reports, and enter other data and commands at the touch of a screen,
thereby eliminating the delay inherent in a keyboard-based system. The
Exchange's Autoquote System enables DPMs to change their published
quotes almost instantaneously in response to changed market conditions,
which in combination with the PAR workstations should permit DPMs to
manage the risk of quoting 100-contract markets.\9\
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\8\See Amendment No. 2 supra note 5. Essentially, Autoquote is a
computer algorithm that allows a market-maker to update his quotes
in all option series (based on his quote for near-term in-the-money
options) automatically to reflect a price change in the underlying
security. See Securities Exchange Act Release No. 24934 (September
22, 1987), 52 FR 36122.
\9\See Amendment No. 2, supra note 5.
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As indicated above, under this proposed rule change and in
accordance with CBOE Rule 8.51, affected DPMs will be obligated to
provide firm quotes for up to 100 contracts on non-broker-dealer
customer orders only. Under the proposal, the firm quote size minimum
will not apply whenever a ``fast market'' is declared,\10\ and may be
suspended for any class or series on a case by case basis as determined
by the CBOE's Market Performance Committee (``MPC''). These exceptions
are consistent with the firm quote commitment requirements for other
options traded on the Exchange.\11\
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\10\Generally, CBOE Rule 6.6 provides that whenever in the
judgment of any two floor officials, because of an influx of orders
or other unusual conditions or circumstances, or in the interest of
maintaining a fair and orderly market, those floor officials may
declare the market in one or more classes of option contracts to be
``fast''. See CBOE Rule 6.6(a).
\11\CBOE Rule 8.51(b) states that the firm quote requirements do
not apply when a ``fast market'' has been declared in a class of
options pursuant to CBOE Rule 6.6. In addition, CBOE Rule 8.51(c)
gives the MPC authority to grant exemptions to the firm quote
requirements for either a class, or series within a class, if it is
determined that the individual situation warrants such action.
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III. Findings and Conclusions
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(b)(5) of the Act.\12\
Specifically, the Commission finds that the CBOE's proposal serves to
facilitate transactions in securities, and to protect investors and the
public interest.
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\12\15 U.S.C. 78f(b)(5) (1988).
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The CBOE's proposal is designed to benefit non-broker-dealer
customers by increasing the size of orders for which they can be
assured executions to a minimum depth of 100 contracts for interest
rate options. Although the Commission carefully scrutinizes
discriminatory order execution practices, limiting the 100 contract
minimum to non-broker-dealer customers is consistent with the purposes
of the Act. The intent of the 100 contract minimum is to allow DPMs in
interest rate options to become more competitive in making markets,
thereby contributing to a more free and open market and facilitating
customer orders.
The Commission believes that the larger markets created by
increasing the minimum firm-quote contract size could result in tighter
spreads. This in turn should contribute to a more liquid options
market, to the benefit of all market participants. Furthermore,
increasing the minimum DPM quote sizes available to customer orders
furthers the underlying purposes of the CBOE's firm quote rule.
By limiting the applicability of the 100 minimum contract size to
classes of interest rate options for which PAR workstations are
available, the CBOE's proposal addresses the need of DPMs to have
flexibility in adjusting their quotes beyond that which is provided by
the Exchange's Autoquote System alone.\13\ The ``fast market''
exception of Rule 6.6 also addresses such concerns by providing DPMs
relief during fast moving markets.\14\ Although the CBOE Rules will
continue to allow the MPC to grant exemptions from the 100 contract
firm quote requirement on a case by case basis,\15\ the Commission
believes such exemptions should only be granted in extraordinary
circumstances.
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\13\The presence of the PAR Workstation enhances the benefits
already provided by the Exchange's Autoquote System. Autoquote
changes DPMs' published quotes automatically in response to changed
market conditions; the PAR workstations allow DPMs greater quote
flexibility than that provided by the CBOE's Autoquote System by
itself.
\14\See supra note 10.
\15\See CBOE Rule 8.51(c).
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The Commission believes that the CBOE rules will ensure that those
DPMs required to meet the 100 contract firm quote guarantee for
interest rate options will be adequately capitalized to handle the
increased guarantee. In this regard, CBOE Rules will continue to
require that member organizations subject to Rule 15c3-1 under the Act
comply with the capital requirements prescribed therein, as well as
comply with certain additional requirements of the CBOE.\16\
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\16\See CBOE Rules, Chapter XIII.
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The Commission also notes that the CBOE's proposal will be
introduced gradually, and initially will only apply to 30-year bond
interest rate options. As the use of PAR workstations extends to other
classes of interest rate options, so too will the applicability of the
100 contract firm quote minimum.
The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. The
Commission believes that Amendment No. 2 serves to clarify the
operation of the Exchange's systems as they relate to a DPM's firm
quote responsibilities. Specifically, Amendment No. 2 describes how PAR
workstations, together with the CBOE's existing Autoquote System, allow
DPMs to adjust quotes with speed and flexibility. In clarifying the
operation of the Exchange's systems, Amendment No. 2 does not create
any substantive changes to the CBOE's proposal. Based on the foregoing,
the Commission believes that it is consistent with Section 6(b)(5) of
the Act to approve Amendment No. 2 to the CBOE's proposal on an
accelerated basis.
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2 to the proposed rule change.
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 in the Commission's Public
Reference Section, 450 Fifth Street NW., Washington, DC. 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-94-17 and should be submitted by November 21, 1994.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (File No. SR-CBOE-94-17), as
amended, is approved.
\17\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-26765 Filed 10-27-94; 8:45 am]
BILLING CODE 8010-01-M
