[Federal Register Volume 60, Number 80 (Wednesday, April 26, 1995)]
[Notices]
[Pages 20542-20544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35629; File No. SR-CBOE-94-44]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving and Notice of Filing and Order Granting
Accelerated Approval of Amendments to a Proposed Rule Change Relating
to Market Maker Appointments
April 19, 1995.
I. Introduction
On November 14, 1994, 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 CBOE Rule 8.3(c) concerning the
number of trading stations at which a single market maker's appointed
classes of options are traded. The proposed rule change was published
for comment and appeared in the Federal Register on January 12,
1995.\3\ on February 21, 1995, the CBOE filed Amendment No. 1 to its
proposal,\4\ on February 24, 1995, the CBOE filed Amendment No. 2 to
its proposal,\5\ and on April 11, 1995, the CBOE filed Amendment No. 3
to its [[Page 20543]] proposal.\6\ No comments were received regarding
the proposal. This order approves the proposal, as amended.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\See Securities Exchange Act Release No. 35192 (January 4,
1995), 60 FR 3012.
\4\In Amendment No. 1, the CBOE provides information comparing
its method of assigning classes of options to that of the American
Stock Exchange (``Amex''), describes the effect of increasing the
number of trading stations to which a market maker's appointment may
relate from five to ten, provides further rationale for this
increase; and states that future changes respecting the number of
applicable trading stations would be made pursuant to a filing under
Section 19(b)(3)(A) under the Act, 15 U.S.C. 78s(b)(3)(A) (1988).
See letter from Michael L. Meyer, Schiff, Hardin & Waite, to
Francois Mazur, Attorney, Division of Market Regulation
(``Division''), Commission, dated February 17, 1995. The reference
in Amendment No. 1 regarding the means by which future changes will
be effected is superseded by Amendment Nos. 2 and 3, infra notes 5
and 6, respectively.
\5\Amendment No. 2 states that the CBOE will discuss with
Commission staff the appropriate manner in which to file future
changes in the maximum number of designated trading stations prior
to making any such filing with the Commission. See letter from Mary
L. Bender, Senior Vice President, Division of Regulatory Services,
CBOE to Francois Mazur, Attorney, Division, Commission, dated
February 23, 1995.
\6\Amendment No. 3 amends the original proposed changes to Rule
8.3(c) by removing reference to the Market Performance Committee
(``MPC'') designating the maximum number of trading stations, and by
removing Proposed Interpretation and Policy .02 which stated that
the MPC had designated such maximum number to be ten. Proposed Rule
8.3(c) now replaces five with ten as the maximum number of trading
stations at which a market maker may hold an appointment. Amendment
No. 3 also discusses the alternative means by which future proposed
changes to Rule 8.3(c) may be filed, and states that the MPC, when
assigning station appointments to market makers, considers, among
other matters, the physical location of stations to be assigned to a
market maker. See letter from Mary L. Bender, Senior Vice President,
Division of Regulatory Services, CBOE, to Michael Walinskas, Branch
Chief, Division, Commission, dated April 10, 1995.
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II. Description of the Proposal
The CBOE proposes to increase from five trading stations to ten the
maximum number of trading stations at which a market maker's appointed
classes of options may be traded pursuant to CBOE Rule 8.3(c).\7\ In
addition, the MPC maintains its authority to provide exemptions to the
trading station limitation. The CBOE's proposal also will have the
effect of allowing market makers to rely on the market maker exemption
to the NASD's short sale rule for hedging a greater number of options
classes, provided that the requirements of the exemption are met.\8\
\7\See Amendment No. 3, supra note 6.
\8\The NASD short sale rule prohibits broker-dealers from
effecting short sales for themselves or their customers at or below
the ``bid'' when the current ``inside'' or best price is below the
previous inside bid. See NASD Rules of Fair Practice, Art. III,
section 48. The CBOE's market maker exemption to the short sale rule
allows options market makers to hedge options positions in their
appointed classes of options by buying or selling (including selling
short) shares of underlying stocks or underlying component stocks
contained in stock indexes. Such an ``exempt hedge transaction'' is
defined by the Exchange as a short sale effected to hedge, and which
in fact serves to hedge, an existing offsetting options position or
an offsetting options position that was created in one or more
transactions contemporaneous with the short sale. See CBOE Rule
15.10.
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III. Discussion
The Commission finds the proposed rule change consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange. Specifically, the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act because the proposal is designed to remove
impediments to and perfect the mechanism of a free and open market, and
protect investors and the public interest.
The Commission believes that increasing the number of trading
stations which may be included in a market maker's appointment from
five stations to ten stations is a reasonable measure designed by the
Exchange to help ensure adequate market maker participation in each
class of options traded on the Exchange. The Exchange has stated that
the effect of increasing the trading station maximum will be to
increase the maximum number of options classes in which a market maker
may hold an appointment. Accordingly, out of a total of 644 classes of
options at the CBOE, the change can result in increases from 137 to 241
in appointed classes, representing an increase from 21% to 37% of the
total number of classes traded on the Exchange.\9\
\9\See Amendment No. 1, supra note 4. In comparison, the CBOE
notes that a registered options trader on the Amex may be assigned
to 300 classes of options or more representing 70% of the 430
classes of options traded on the Amex. Id.
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The Commission believes that the CBOE's proposal will benefit the
market and investors by increasing the potential number of options
classes to which the obligations of a market maker will apply.\10\
Although the Commission recognizes that the proposal can result in
increasing a market maker's appointed classes by over 100 classes, we
believe adequate market making capabilities and obligations will
continue to exist in such classes. In this regard, the Commission
expects CBOE to assess whether market makers have adequate capital to
fulfill their continual market making obligations under CBOE Rule 8.7
in all their appointed classes. Further, the in-person and general
trading requirements applicable to market makers under CBOE Rule 8.7,
Interpretation and Policy .03\11\ should continue to ensure that market
making is adequate in all appointed classes.\12\ Finally, in light of
the growth of the number of options traded on the Exchange in recent
years, the increase from 21% to 37% of the classes traded on the CBOE
is reasonable.\13\
\10\For example, CBOE Rule 8.7 requires generally that a market
maker's transactions constitute a course of dealing reasonably
calculated to contribute to the maintenance of a fair and orderly
market. Specific requirements include a market maker's continuous
obligation to deal for his or her own account when there is a lack
of price continuity; or when there is a disparity between supply and
demand for a particular option contract, or between options
contracts of the same class. In fulfilling these requirements,
market maker must, among other things, compete with other market
makers to improve markets, make markets, and update market
quotations in response to changed market conditions.
The Commission notes that increasing the number of trading
stations at which a market maker may hold an appointment does not in
any way lessen a market maker's obligation to make a market. The
CBOE has stated that the MPC, when assigning station appointments to
market makers, considers, among other matters, the physical location
of the stations to be assigned to a market maker. See amendment No.
3, supra note 6.
\11\CBOE Rule 8.7, Interpretation .03 generally requires that at
least 25% of a market maker's transactions be executed in person,
and not through the use of orders. Moreover, at least 75% of a
market maker's total contract volume must be in option classes to
which the market maker has been appointed.
\12\The Commission notes that any further increases may warrant
the development of additional standards to ensure adequate market
making performance.
\13\The CBOE has indicated in its proposal that, in the future,
it will consult with Commission staff in order to determine the
appropriate rule filing method for proposing any further increases
to the maximum trading stations at which a market maker may hold an
appointment. The alternatives would include: (1) filing a proposal
pursuant to Section 19(b)(2) of the Act, which requires that the
Commission publish notice of the proposal and provide an opportunity
for public comment; or (2) filing a proposal pursuant to Section
19(b)(3)(A) of the Act, including either a filing that would be
effective immediately upon filing, or operative 30 days after the
filing date, if filed as a non-controversial rule proposal. See
Amendment Nos. 2 and 3, supra notes 5 and 6, respectively.
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The Commission finds good cause for approving Amendment No. 1, as
modified by, and together with, Amendment Nos. 2 and 3, prior to the
thirtieth day after the date of publication of notice of filing thereof
in the Federal Register. Amendment No. 1 provides additional
information regarding the number of options classes affected by the
Exchange's proposal, as well as general information regarding the
structure of its trading floor. Amendment No. 2 modifies Amendment No.
1 by stating that the CBOE will consult with Commission staff regarding
the manner in which to file any future changes to the maximum number of
trading stations at which market makers may hold appointments.
Amendment No. 3 effects changes to Proposed Rule 8.3(c), but does not
change the effect of the Exchange's proposal.
The Commission believes that these changes do not affect the
substance of the Exchange's proposal because they merely serve to
provide additional data regarding the proposal, describe guidelines for
seeking Commission approval of future changes by the MPC in trading
station appointments, and fashion minor textual changes to the proposed
language of Rule 8.3(c). Accordingly, the Commission believes the
Amendments raise no new or unique regulatory issues. Therefore, the
Commission believes it is consistent with Sections 6(b)(5) and 19(b)(2)
of the Act\14\ to approve Amendment Nos. 1, 2, and 3 to the proposal on
an accelerated basis.
\14\15 U.S.C. 78f(b)(5) and 78s(b)(2) (1988). [[Page 20544]]
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendments Nos. 1, 2, and 3. 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 in the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 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 File No. SR-CBOE-94-44 and should
be submitted by May 17, 1995.
V. 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-94-44), as
amended, is approved.
\15\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.\16\
\16\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10222 Filed 4-25-95; 8:45 am]
BILLING CODE 8010-01-M
