[Federal Register Volume 61, Number 214 (Monday, November 4, 1996)]
[Notices]
[Pages 56728-56729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28183]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37876; File No. SR-CBOE-96-15]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule Change Relating to the Placing of
Orders Over the Outside Telephone Lines at the Equity Trading Posts
October 28, 1996.
I. Introduction
On March 12, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with 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 proposal to amend its Regulatory Circular governing
the use of member-owned or Exchange-owned telephones located at the
equity trading post on the floor of the Exchange. The proposed rule
change was published for comment and appeared in the Federal Register
on April 8, 1996.\3\ No comments were received. This order approves the
proposal.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 37050 (March 29, 1996),
61 FR 15542.
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II. Description of the Proposal
CBOE Rule 6.23 \4\ currently prohibits orders of any type to be
entered via outside telephone lines at equity option trading posts.\5\
The rule change would amend this prohibition by permitting market
makers only to place orders with floor brokers over the outside
telephone lines at equity option trading posts.\6\ The policy for use
of the telephones at the equity posts will remain unchanged in every
other respect. Thus, for example, customers will not be permitted to
place orders over the telephones located at the equity posts.
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\4\ Exchange Rule 6.23 prohibits members from establishing or
maintaining any telephone or other wire communications between their
offices and the Exchange floor, and it authorizes the Exchange to
direct the discontinuance of any communication facility terminating
on the Exchange floor.
\5\ See Securities Exchange Act Release No. 33701 (March 2,
1994), 59 FR 11336 (March 10, 1994) (order approving the Exchange's
equity options telephone policy).
\6\ Currently, the Exchange permits market makers to place
orders with floor brokers via intra-floor lines.
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In its filing, the Exchange stated that the purpose of the proposed
rule change was to permit market makers to transmit their orders more
efficiently even when they need to be off the floor to attend to
personal or Exchange business. The Exchange stated in its filing that
this change will be particularly useful to those members of the
Exchange that are often requested to attend meetings on Exchange
matters during the trading day.
Orders of market makers placed over the outside telephone lines
pursuant to the amended policy will be counted as off-floor orders for
purposes of determining a market maker's compliance with the 80%
requirement of Rule 8.7. Pursuant to Interpretation .03 of Rule 8.7,
Obligations of Market-Makers, a market maker must execute in-person 80%
of his total transactions to receive market maker treatment for off-
floor orders. An order that receives market maker treatment is entitled
to certain benefits, such as favorable margin treatment under Federal
Reserve Board Regulation T; therefore, there is an incentive for market
makers to satisfy the 80% requirement. Also, Interpretation .03 of Rule
8.7 states that the off-floor orders for which a market maker receives
market maker treatment shall be effected for the purpose of hedging,
reducing risk of, rebalancing, or liquidating open positions of the
market maker. Finally, Interpretation .03 to Rule 8.7 also requires a
market maker, at a minimum, to execute at least 25% of his total
transactions in-person.
As with the current policy governing the use of telephones at the
equity trading posts, the Exchange intends to monitor compliance with
these conditions by means of customary floor surveillance procedures,
including reliance on surveillance by Floor Officials and Exchange
employees. In addition, the Exchange will review on a weekly basis
clearance data, as it does now, to assure that a market maker meets the
80% in-person requirement.
III. Discussion
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,\7\ in that
it is designed to promote just and equitable principles of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, prevent fraudulent and
manipulative acts and practices, and, in general, to protect investors
and the public interest; and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\7\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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Specifically, the Commission believes that the proposed rule change
may allow market makers more efficient access to equity option posts
when they are off the Exchange floor temporarily which could
potentially enhance liquidity. In this context, under CBOE Rule 8.7(a),
any orders placed by a market maker over the outside telephone lines at
the equity post should constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market. As noted above, the other requirements of Rule 8.7 should also
help to ensure that access to place orders over the outside telephone
lines
[[Page 56729]]
will not be used as a method to avoid standing in the crowd and
fulfilling market making duties.
The Commission notes that the policy does differentiate between
market makers and customers in that the amended policy will continue to
prohibit customers from placing orders with floor brokers over the
outside telephone lines. By contrast, customers are permitted direct
telephone access to enter orders with floor brokers in the trading
crowds of certain CBOE index options.\8\ However, the Commission
believes that it is not unreasonable for CBOE to prohibit customers
from placing orders directly with floor brokers in equity options
trading crowds. The CBOE has represented to the Commission that CBOE
members may not wish that their customers receive direct phone access
to equity crowds because equity options tend to be used more widely by
retail customers: direct phone access may inhibit member firms' ability
to discharge their customer suitability and margin obligations.\9\
Furthermore, member firms do not commonly station a floor-broker in
each equity trading crowd on the floor.\10\ Floor brokers commonly are
responsible for representing orders in multiple crowds, which means
that customers are less likely to be able to direct orders to a
particular floor broker in a particular crowd.\11\
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\8\ See Letter from Mary L. Bender, Senior Vice President, CBOE,
to Sharon Lawson, Senior Special Counsel, Division of Market
Regulation, Commission, dated October 18, 1996 (available in
Commission's Public Reference Room).
\9\ Id.
\10\ Id.
\11\ Id.
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Furthermore, CBOE offers automated systems that permit member firms
to ensure that customer orders are swiftly routed to the floor of the
exchange.\12\ Approximately 70% of customer orders are routed through
CBOE's Order Routing System (``ORS''), which provides an electronic
interface between the Exchange's trading systems and the member firms'
order transmission systems.\13\ In summary, because customer orders can
be transmitted quickly to the post through other means, direct customer
telephone access may cause compliance problems for members firms while
offering uncertain access to the trading crowd and because the
Commission has not received any comments about alleged unfair
discriminatory effects objecting to the proposed rule change, the
Commission believes it is reasonable to conclude that the amended
telephone policy is not presently designed to permit unfair
discrimination.\14\
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\12\ See id.
\13\ See id. ORS routes customer orders that qualify for firm
quote guarantees to the Retail Automatic Execution System
(``RAES''), which automatically and instantaneously executes such
orders. According to CBOE, approximately 1 out of 5 customer orders
at the CBOE are executed through RAES. ORS routes pre-opening market
orders and limit orders, and limit orders at least one price tick
away from the same-side market quote to the Exchange's Electronic
Book. Finally, ORS routes market orders not eligible for firm quote
guarantees and limit orders ``near'' the market quote to the trading
crowd. Such orders are delivered either to printers or to Public
Automated Routing (``PAR'') System touch screen terminals in the
trading pit. According to CBOE, the capabilities of the PAR
workstation allows customer orders routed through it to ``enjoy
turnaround time second only to RAES.''
\14\ See Timpinaro v. SEC, 2 F.3d 453, 457 (D.C. Cir. 1993)
(finding that the Act prohibits only unfair discrimination, not all
discrimination).
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The Commission expects the CBOE to maintain surveillance procedures
that are adequate to ensure that market makers do not use the amended
telephone policy to avoid standing in their respective crowds or to
assume de facto an appointment in an option traded at another post. In
addition, the Commission believes that the 80% in-person requirement
will serve to discourage market makers from utilizing the amended
telephone policy to avoid standing in their respective crowds or to
assume de facto an appointment in an option traded at another post.
IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Section 6 of
the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (File No. SR-CBOE-96-15) is
approved.
\15\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28183 Filed 11-1-96; 8:45 am]
BILLING CODE 8010-01-M
