[Federal Register Volume 61, Number 34 (Tuesday, February 20, 1996)]
[Notices]
[Pages 6400-6402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3633]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36830; File No. SR-CBOE-95-33]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Chicago Board
Options Exchange, Inc., Relating to an Amendment to the Exchange's
Crossing Rule
February 12, 1996.
On July 12, 1995, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``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 amend CBOE Rule 6.74, ``
`Crossing' Orders,'' by adding Interpretation and Policy .05, which
will allow a floor broker who has been continuously representing a
limit order to buy or sell equity option contracts in a trading crowd
at a limit price which is equal to the highest bid or lowest offer
(``resting order''), and who subsequently receives a market or
marketable limit order to sell or buy the same option series, to cross
the resting order with the subsequent market or marketable limit order
without regard to the provision of CBOE Rule 6.74(a)(iii) that permits
a cross only if the higher bid or lower offer is not taken. The
proposal is designed to permit a floor broker representing a resting
order and a subsequent market or marketable limit order to cross the
number of contracts of those orders to the same extent as if the
resting order and the subsequent market or marketable limit orders were
represented by different floor brokers.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1995).
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Notice of the proposed rule change appeared in the Federal Register
on October 13, 1995.\3\ On January 31, 1996, the CBOE amended its
proposal.\4\ No comments were received on the proposed rule change.
\3\ See Securities Exchange Act Release no. 36343 (October 5,
1995), 60 FR 53444.
\4\ The CBOE amended its proposal to clarify that, under the
proposal, a floor broker may cross a resting order with a subsequent
market or marketable limit order without regard to the provision of
CBOE Rule 6.74(a)(iii) which permits a cross only if a floor
broker's higher bid or lower offer is not taken. However, a floor
broker must comply with the order exposure and price improvement
provisions of CBOE Rule 6.74 before being eligible for the proposed
exception. In addition, after invoking the exception, the floor
broker remains subject to the requirement under CBOE Rule
6.74(a)(iii) that the floor broker announce by open outcry that he
is crossing and give the quantity and price at which the cross took
place. See Letter from Barbara J. Casey, Vice President, Market
Regulation, CBOE, to Ivette Lopez, Assistant Director, Division of
Market Regulation, Commission, dated January 30, 1996 (``Amendment
No. 1''). Amendment No. 1 also provides examples of the operation of
the crossing rule and of the effect of the proposed amendment on the
crossing rule, as well as explanations of the terms ``continuously
represent'' and ``compete equally.'' Specifically, Amendment No. 1
states that it is implicit in the term ``continuously represents''
that after announcing the order in open outcry, the floor broker
must give the trading crowd a reasonable amount of time to respond
to the announcement before the floor broker can claim the proposed
exception to the crossing rule. The term ``compete equally'' is used
to limit the extent to which a floor broker is permitted to cross a
resting order and a market or marketable limit order. Specifically,
the proposal will give a floor broker representing a resting order
and a subsequent market or marketable limit order the ability to
compete equally with the trading crowd, but only to the extent that
such orders would be executed if they were represented by two
different floor brokers.
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Currently, CBOE Rule 6.74(a) imposes specific order exposure and
price improvement requirements on floor brokers seeking to cross buy
orders with sell orders. Specifically, CBOE Rule 6.74(a) requires a
floor broker seeking to cross orders to buy and sell the same option
series to (i) request bids and offers for such option series and make
all persons in the trading crowd, including the Board Broker or Order
Book Official, aware of his request; and
[[Page 6401]]
(ii) after providing an opportunity for such bids and offers to be
made, he must (A) bid above the highest bid in the market and give a
corresponding offer at the same price or at prices differing by the
minimum fraction or (B) offer below the lowest offer in the market and
give a corresponding bid at the same price or at prices differing by
the minimum fraction. If the higher bid or lower offer is not taken,
CBOE Rule 6.74(a)(iii) allows the floor broker to cross the orders at
the higher bid or lower offer by announcing by public outcry that he is
crossing and giving the quantity and price.
According to the CBOE, the provision of CBOE Rule 6.74(a)(iii) that
allows a cross only if the higher bid or lower offer is not taken
prevents a resting order from competing equally with other pre-existing
bids (offers) and allows the trading crowd to trade ahead of the new
market or marketable limit order to buy or sell. Thus, the CBOE notes
that the resting order and the subsequent market or marketable limit
order may be in a less competitive position because the orders were
represented by a single floor broker rather than by separate floor
brokers.
For example,\5\ if a floor broker has been continuously
representing \6\ a limit order to purchase 20 option contracts at a
limit price of $10 where the market is 10-10\1/4\, and the floor broker
subsequently receives a market order to sell 20 option contracts of the
same series, CBOE Rule 6.74(a) requires a floor broker who wishes to
cross the orders to offer at $10 (i.e., less than the lowest offer of
10\1/4\) and corresponding bid at $10.\7\ The floor broker may cross
the two orders only if the trading crowd does not take the floor
broker's bid or offer. However, according to the CBOE, it is likely
that the trading crowd will take the floor broker's offer of $10
because the trading crowd was bidding at $10. Accordingly, the resting
order will not be filled, even though it may have been previously
represented in the crowd for at least as long as the successful bids of
other crowd members. Thus, under existing CBOE Rule 6.74(a), a resting
limit order held by a floor broker who subsequently receives a market
order is unable to compete for the market order with other limit orders
at the same price held by other crowd members.
\5\ See Amendment No. 1, supra note 4.
\6\ In the context of the proposal, ``continuously
representing'' means that after announcing an order in open outcry,
the floor broker must give the trading crowd a reasonable amount of
time to respond to his announcement before he may claim the proposed
exception to CBOE Rule 6.74(a)(iii). See Amendment No. 1, supra note
4.
\7\ Because the limit price to purchase is $10, the floor broker
cannot bid above the highest bid in the market and thus is precluded
from crossing at 10\1/8\ pursuant to CBOE Rule 6.74(a)(ii)(A).
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Proposed Interpretation and Policy .05 is designed to allow a floor
broker representing a resting order and a subsequent market or
marketable limit order to compete equally with other bids and offers in
the trading crowd by allowing the floor broker to cross the orders to
the same extent as if the resting order and the subsequent market or
marketable limit order were represented by different floor brokers.\8\
Thus, in the example described above, if the trading crowd includes
four market makers each bidding at $10 who wish to take the entire
offer, proposed Interpretation and Policy .05 would allow the floor
broker to claim the proposed exception to CBOE Rule 6.74(a)(iii) and
participate equally in the 20-contract offer by crossing four contracts
of the resting order with four contracts of the sell order at $10, the
then existing bid price in the market. The remaining 16 contracts of
the market order would be sold to the trading crowd.\9\
\8\ The proposal uses the term ``compete equally'' to limit the
extent to which a floor broker is permitted to cross a resting order
and a market or marketable limit order. Currently, the CBOE's
crossing rule allows a floor broker to cross a resting order and a
subsequent order only if the trading crowd does not take the floor
broker's bid or offer. However, if the trading crowd decides to take
the market order, the resting order will not be able to participate
in the transaction with the market or marketable limit order;
alternatively, the trading crowd may take the resting order and
trade ahead of the subsequent market or marketable limit order.
According to the CBOE, proposed Interpretation and Policy .05 will
remove the floor broker's competitive disadvantage and allow the
floor broker representing a resting order and a subsequent market or
marketable limit order to compete with the trading crowd to the
extent that such orders would be executed if they were represented
by two different floor brokers. See Amendment No. 1, supra note 4.
\9\ See Amendment No. 1, supra note 4.
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Likewise, if the market makers wish to offer at $10 and take the
entire resting limit order, the floor broker may claim the proposed
exception and compete equally with other offers in the trading crowd by
crossing four contracts of the subsequent market order to sell at $10
with four contracts of the resting limit order.\10\
\10\ Id.
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Proposed Interpretation and Policy .05 provides an exemption solely
from the provision of CBOE Rule 6.74(a)(iii) that permits a cross only
if the higher bid or lower offer is not taken. The floor broker must
comply with the order exposure and price improvement provisions of CBOE
Rule 6.74(a) (i) and (ii) before being eligible for the proposed
exception. After invoking the exception, the floor broker remains
subject to the requirement in CBOE Rule 6.74(a)(iii) that the floor
broker announce by open outcry that he is crossing and give the
quantity and price at which the cross took place.\11\ In addition, the
Exchange's rules pertaining to solicited orders, facilitation crosses,
and the priority provisions of CBOE Rule 6.45, ``Priority of Bids and
Offers,'' will continue to apply.
\11\ Id.
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The Exchange believes that proposed Interpretation and Policy .05
will reduce the possible detrimental effect on the execution of a
resting order and subsequent market or marketable limit orders that
occurs solely because the orders are represented by the same floor
broker. The CBOE states that proposed Interpretation and Policy .05
will permit the orders represented by a single floor broker to compete
equally with other bids and offers in the trading crowd by allowing the
floor broker to cross those number of contracts of the resting order
with subsequent market or marketable limit orders to the same extent as
if the resting order and subsequent market or marketable limit orders
were represented by different floor brokers.
The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that it provides an exemption from
provisions that currently disadvantage resting limit orders and
subsequent market or marketable limit orders held by the same floor
broker, and does this in a manner that promotes just and equitable
principles of trade, fosters cooperation among persons engaged in
facilitating securities transactions, removes impediments to and
perfects the mechanism of a free and open market and protects investors
and the public interest.
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) \12\ in that it is
designed to promote just and equitable principles of trade and to
protect investors and the public interest. The Commission believes that
proposed Interpretation and Policy .05 provides a limited and narrowly
tailored exception to the provision of CBOE Rule 6.74(a)(iii) that
permits a cross only if the trading crowd does not take the floor
broker's higher bid or lower offer. By
[[Page 6402]]
creating a limited exception to CBOE Rule 6.74(a)(iii), proposed
Interpretation and Policy .05 will permit orders represented by a
single floor broker to participate equally with other bids and offers
in the trading crowd by allowing the floor broker to cross those number
of contracts of the resting order with the subsequent market or
marketable limit order to the same extent as if those orders were
represented by different floor brokers, thereby eliminating a
competitive disadvantage that may arise currently under CBOE Rule
6.74(a).
\12\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
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CBOE Rule 6.74(a)(ii) requires a floor broker seeking to cross
orders to (A) bid above the highest bid in the market and give a
corresponding offer at the same price or at prices differing by the
minimum fraction or (B) offer below the lowest offer in the market and
give a corresponding bid at the same price or at prices differing by
the minimum fraction. CBOE Rule 6.74(a)(iii) allows the floor broker to
cross the orders if the trading crowd does not take the higher bid or
lower offer. However, the CBOE states that it is likely that the
trading crowd will take the floor broker's bid or offer, thereby
leaving either the resting order or the subsequent market or marketable
limit order unfilled. By creating an exception to the provision of CBOE
Rule 6.74(a)(iii) that permits a cross only if the floor broker's
higher bid or lower offer is not taken, proposed Interpretation and
Policy .05 will allow a resting order and a subsequent market or
marketable limit order represented by a single floor broker to
participate equally with other bids and offers at the same price to the
same extent as if those orders were represented by different floor
brokers.\13\
\13\ The CBOE believes that the exception provided by proposed
Interpretation and Policy .05 will be claimed infrequently, both
because the proposed exception applies only in very limited
circumstances, and because even in the limited applicable
circumstances most trading crowds do not use the crossing rule to
prevent a resting order from competing equally with other bids or
offers in the market or to trade ahead of market or marketable limit
orders. The CBOE expects that the proposed exception will be claimed
by floor brokers in equity option crowds that preclude floor brokers
from crossing orders or in equity trading crowds that have only one
full time floor broker and where the volume in the option series to
be crossed is limited. See Amendment No. 1, supra note 4.
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Thus, as noted above, proposed Interpretation and Policy .05 will
allow a floor broker representing a resting limit order to buy at $10
in a 10-10\1/4\ market to compete equally with four market makers in
the trading crowd who are also bidding at $10 for a market order to
sell 20 contracts, so that the floor broker will be able to cross four
contracts of his resting order with four contracts of the market order.
The market makers will take the remaining 16 contracts of the market
order. In contrast, under the CBOE's current rule, the market makers
could take the entire offer to sell 20 contracts at $10, leaving the
resting limit order unfilled even though the resting order also bid $10
(an amount equal to the highest bid in the market) and had been
represented in the crowd for as long as the bids of the market
makers.\14\
\14\ Alternatively, if the market makers wish to sell at $10 and
take the entire resting limit order, proposed Interpretation and
Policy .05 will allow the floor broker to compete equally with the
market makers' offers and cross four contracts of the resting order
with four contracts of subsequent market order. The market makers
will take the remaining contracts in the resting order.
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Accordingly, the Commission believes that the proposal is a
reasonable effort to modify CBOE Rule 6.74(a)(iii) to ensure that
certain equity option orders are not disadvantaged solely because they
are represented by a single floor broker. At the same time, the
proposal maintains the safeguards provided in CBOE Rule 6.74(a) by
requiring floor brokers to comply with the order exposure and price
improvement provisions of CBOE Rule 6.74(a) (i) and (ii) before being
eligible for the proposed exception to CBOE Rule 6.74(a)(iii). In
addition, proposed Interpretation and Policy .05 applies to a floor
broker who has been ``continuously representing'' a resting order.\15\
The Commission believes that the requirements of CBOE Rule 6.74(a) (i)
and (ii), together with the requirement that a floor broker
continuously represent a resting order before claiming the proposed
exception to CBOE Rule 6.74(a)(iii), will help to ensure that orders
represented by a floor broker who claims the proposed exception will
have an opportunity to interact with orders in the trading crowd.
\15\ See note 6, supra.
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The Commission notes that after invoking the exception, the floor
broker remains subject to the requirement in CBOE Rule 6.74(a)(iii)
that the floor broker announce by open outcry that he is crossing and
give the quantity and price at which the cross took place. Finally, the
due diligence and other provisions of CBOE Rule 6.74 continue to apply,
as well as the CBOE rules pertaining to solicited orders, facilitation
crosses, and the priority provisions of CBOE Rule 6.45.
The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Amendment No. 1 strengthens and
clarifies the CBOE's proposal by indicating that a floor broker must
comply with the order exposure and price improvement provisions of CBOE
Rule 6.74(a)(i) and (ii) and, after invoking the exception, must
announce by open outcry that he is crossing and give the quantity and
price at which the cross took place. In addition, Amendment No. 1
further clarifies the proposal by defining the terms ``continuously
representing'' and ``compete equally'' as they are used in the
proposal. Accordingly, the Commission believes it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 1 to
the proposal on an accelerated basis.
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, N.W., Washington, D.C. 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, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by March 12, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the rule change (File No. SR-CBOE-95-33), as amended, is
approved.
\16\ 15 U.S.C. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
\17\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3633 Filed 2-16-96; 8:45 am]
BILLING CODE 8010-01-M
