[Federal Register Volume 63, Number 56 (Tuesday, March 24, 1998)]
[Notices]
[Pages 14151-14152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7515]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39763; File No. SR-CBOE-98-04]
Self-Regulatory Organizations; Proposed Rule Change by the
Chicago Board Options Exchange, Incorporated Clarifying the Application
of Exchange Rules 8.7 and 8.51 to the Activities of Market-Makers on
the CBOE
March 16, 1998.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 6, 1998, 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 CBOE. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Change
CBOE proposes to amend certain of its rules pertaining to the
obligations of market-makers. 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, CBOE 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 CBOE 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
The purpose of the proposed rule change is to clarify the
application of Exchange Rules 8.7 and 8.51 to the activities of market-
makers on CBOE by amending or adopting interpretations and policies
under those Rules. Rule 8.7 requires, among other things, that market-
makers on CBOE ``compete with other Market-Makers to improve markets in
all series of options classes at the station where a Market-Maker is
present.'' Rule 8.51 imposes firm quotation obligations on trading
crowds. Ordinarily, in meeting these obligations, each market-maker
makes his or her own independent decision concerning what market to
quote at any given time, and does not attempt to discuss or agree with
other market-makers concerning what the market ought to be. However,
there are circumstances where, in order to make fair and orderly
markets that are competitive with other markets and responsive to the
legitimate needs of investors, some coordination among market-makers is
necessary. These circumstances arise (1) in connection with the
establishment of parameters used by the automated quotation updating
system (which is generally the Exchange's Auto Quote system) to
automatically generate options quotations in response to changes in the
market for the underlying security or index; (2) in responding to
requests for markets in size, such that the coordinated efforts of more
than one market-maker are called for in order to be able to fill any
resulting order to buy or sell options; and (3) whenever a trading
crowd, in order to be competitive with other markets, determines
collectively to honor its disseminated quotations in a size greater
than the six (ordinarily 10 contracts) called for under the Exchange's
firm quotation rule (Rule 8.51). As described below, the purpose of
this filing is to describe the nature and extent of coordination among
market-makers that is permitted under each of these circumstances.
Auto Quote Formulas
Automated quotation updating systems, which are relied upon by all
trading crowds to provide immediately updated quotations in options
series traded by the crowd, utilize option valuation formulas in order
to generate options quotations based on changes in any one of a number
of variables. Among other things, these formulas require assumed
volatility factors to be established for each underlying interest. The
quotations that are generated and displayed by these systems translate
into obligations of the trading crowd to buy or sell options at the
quoted prices. For this reason, all members of the trading crowd
participate in the decisions concerning the components of the automated
quotation updating system formula applicable to each class of options
traded by the crowd. Proposed Interpretation and Policy 8.8.07 reflects
this by providing expressly that the formula used in each
[[Page 14152]]
trading crowd to generate automatically updated market quotations shall
be as agreed upon by the trading crowd. This is made subject to the
exception that in those trading crowds where a Designated Primary
Market-Maker (``DPM'') has been appointed, the DPM has the primary
responsibility for determining the variables of the formula used to
generate automatically updated market quotations. The DPM is required
to disclose the components used in that formula to any member of the
trading crowd immediately upon request, provided that the MTS Committee
will have the discretion to exempt DPMs using proprietary automated
quotation updating systems from having to disclose proprietary
information concerning the formulas used by those systems.
Joint Responses to Requests for Markets
When a request for a market to buy or sell a large number of
options is submitted to a trading crowd, it is usually the case that
the customer on whose behalf the request is made wants to know promptly
at what single price all of the options represented by the request can
be bought or sold. A unitary specialist at another competing market is
better equipped to provide this kind of response. In order to compete
effectively, the collective members of a market maker trading crowd
must also provide a response to this kind of request. Interpretation
and Policy 8.7.09 expressly permits the collective response to a group
of members.
A Crowd's Agreeing to Honor its Market at a Greater Than Required Size
CBOE's firm quote rule (Rule 8.51) generally obligates each trading
crowd to honor disseminated quotations for ten contracts. In some
cases, especially for classes of options traded in more than one
market, trading crowds on CBOE may be required by competitive and other
business considerations to honor disseminated quotations for more than
the required ten contracts. CBOE believes this necessarily requires
agreement among the market-makers in the trading crowd before it can be
announced. Interpretation and Policy 8.51.09 expressly contemplates
such an agreement among the members of a trading crowd.
By enhancing the ability of CBOE to make competitive, fair and
orderly markets in options, the proposed rule change is consistent
with, and in furtherance of, the objectives of Section
11A(a)(1)(C)(ii)\2\ of the Act to assure fair competition among
markets, and the objectives of Section 6(b)(5)\3\ of the Act to perfect
the mechanism of a free and open market and a national market system
and to protect investors and the public interest.
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\2\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
\3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE 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 publciation 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, 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.
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 Room. Copies of such timing will also be
available for inspection and copying at the principal office of CBOE.
All submissions should refer to the File No. SR-CBOE-98-04 and should
be submitted by April 14, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-7515 Filed 3-23-98; 8:45 am]
BILLING CODE 8010-01-M
