[Federal Register Volume 62, Number 100 (Friday, May 23, 1997)]
[Notices]
[Pages 28525-28527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13608]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38650; File No. SR-CBOE-97-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Board Options
Exchange, Incorporated, Relating to OEX-SPX Spread Orders
May 16, 1997.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') and Rule 19b-4 thereunder \2\ notice is hereby given
that on March 4, 1997, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II and III below, which Items have been prepared
by the self-regulatory organization. On May 15, 1997, the CBOE
submitted an amendment (``Amendment No. 1'') to the proposed rule
change.\3\ The Commission is
[[Page 28526]]
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).
\2\ 17 CFR 240.19-4.
\3\ On May 15, 1997, the CBOE filed Amendment No. 1 to its
proposal. In Amendment No. 1, the CBOE revised the proposed language
of Rule 24.18 to make it clearer and provided further justification
and explanation for providing a special rule of priority for OEX-SPX
spread orders. See Letter from Timothy Thompson, Senior Attorney,
CBOE, to Elaine Darroch, Attorney, Division of Market Regulation,
Securities and Exchange Commission, dated May 14, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to establish a rule to facilitate the
transaction of spread orders between S&P 500 Index options (``SPX'')
and S&P 100 Index options (``OEX'') at either the OEX trading post or
the SPX trading post.
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 section 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, as amended, is to
establish a new rule to facilitate the transaction of both legs of a
spread order between options on the SPX and options on the OEX at
either the OEX trading post or the SPX trading post. This new Rule
24.18 (``Rule''), which sets forth a special procedure for spreads
between two products traded at different trading posts, recognizes the
unique nature of the two largest trading crowds on the floor of the
Exchange and the close relationship of the options traded at those two
posts. Member firms routinely get requests from customers to transact a
spread strategy between OEX and SPX.\4\ Traders and customers alike
often employ strategies involving the two options because of the close
relationship in the movement between the indexes underlying these
options.\5\ SPX traders commonly hedge their SPX positions with OEX
options, just as OEX traders hedge their OEX positions with SPX
options. In addition, many customers and traders of OEX hedge their OEX
positions with S&P 500 index features because there are no widely
available products with the S&P 100 index as an underlying.\6\
Consequently, these customers and traders will employ an OEX-SPX spread
strategy to hedge the residual risk from using an imperfect hedge of
S&P 500 futures for OEX.\7\ Traders and customers have found that
trading OEX and SPX in a strategy is a very effective way to manage
risk.\8\
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\4\ See Amendment No. 1, supra note 3.
\5\ Id.
\6\ Id.
\7\ Id.
\8\ Id.
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Under the current rules, it is difficult for brokers to execute
these strategies on behalf of customers.\9\ When the two legs of the
strategy cannot be quoted at one price and traded at the same post then
there is a large risk that the market will move in the time it takes to
send the second order to the other trading pit to be executed.
Consequently, the second leg of the strategy may not be filled at a
price that makes the strategy feasible.\10\ In many cases, depending on
the movement of the market, the execution of the second leg of the
order may exacerbate any risk that already existed and which the
strategy was intended to hedge. In contrast, the market for spreads in
which both legs can be traded at the same post likely will be tight and
competitive.\11\ In these cases, there is no risk that the market will
move because the legs are being traded together at one price. The
markets are likely to be quoted at a narrower bid-ask interval than
would be the spread if it was quoted as two legs individually.\12\ The
Options Clearing Corporation recognizes the benefits of hedging OEX and
SPX because these products may be maintained in the same cross-margin
account.\13\ The Commission also has recognized the relationship
between these options by permitting haircut relief for offsetting
positions between these options under the risk-based haircut rules.\14\
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\9\ Id.
\10\ Id.
\11\ Id.
\12\ Id.
\13\ Id.
\14\ Id.
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Although the Rule gives customers (through brokers) and members an
opportunity to trade both legs of these spreads at one location on the
floor, the procedures in Rule 24.18 serve to protect customer orders in
the public customer limit order books of both products and the customer
orders being represented in the crowd at both trading posts. This is
accomplished, as described below, by requiring the member representing
the OEX-SPX spread order to check the public customer limit order books
before filing the order and by requiring notice of the order to be sent
to the other trading crowd.
Paragraph (a) of the Rule defines an OEX-SPX spread order as an
order to buy a stated number of OEX (SPX) options contracts and to sell
an equal number of SPX (OEX) options contracts. The requirement that
the number of options contracts be equal ensures that this procedure is
only used for legitimate spread transactions and is not used to gain
unfairly the special priority that is accorded to spread transactions,
as detailed further below. Although some customers or traders
legitimately trade spreads of equal deltas instead of equal numbers of
contracts, the Exchange decided that it would be simpler and easier to
surveil for spread orders of equal numbers of contracts. Spreads of
equal numbers of OEX and SPX contracts would generally be substantially
similar to spreads of equal deltas and should allow for customers and
traders accomplish their objectives.
In addition, the Exchange selected spread orders of equal numbers
of contracts, rather than equal contract values, because customer
interest has generally been expressed in terms of equal numbers of
contracts and the value of the indexes and the correlation of the
movement of the two indexes is particularly close.\15\ The Exchange
will continue to review this requirement to determine if a future
changes seems warranted.
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\15\ Id. The value of OEX is 823.55 and SPX is 837.66 as of the
close of May 12, 1997. See Amendment No. 1, supra note 3.
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Paragraph (b) of the Rule sets forth the procedures to be followed
in representing and filling an OX-SPX spread order. An OEX-SPX spread
order may be represented initially at either the OEX or SPX trading
post. The trading post where the order is first represented will be the
``primary trading station'' for purposes of the Rule. Immediately after
the order is represented at the primary trading station, or concurrent
with the announcement of such order, the member initiating the order
must contact the Order Book Official at the other trading station (OEX
or SPX). The announcement at the other trading station must specify the
terms of the order, a contact person for the order, and the telephone
number of the contact person at the primary trading station.\16\
[[Page 28527]]
The form of the announcement in the other trading station will be
determined by the appropriate Floor Procedure Committee for the trading
station where the announcement is to be made.
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\16\ The contact person does not have to, but may, provide
brokerage to the members of the other trading crowd. The notice,
however, will inform the members of he other trading crowd who they
should contact if they want to participate in the trade.
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Once the order has been represented at the primary trading station
and the order has been announced at the other trading station, the
member representing the order may fill the order at the best net debit
or credit, whether from the primary trading station or from the other
trading station, provided the conditions described below are met. The
priority of the bids and offers on OEX-SPX spread orders will be
determined by the same concept that applies to spread orders on a
single class of options as set forth in Rule 6.45(d). Paragraph
(b)(iii) provides that a member holding an order on an OEX-SPX spread
that is priced net at a multiple of \1/16\ i.e., \1/4\, \3/8\, \7/16\,
\1/2\, etc.) will have priority over bids and offers in the trading
crowd if both legs of the OEX-SPX spread would trade at a price that is
at least equivalent to quotes in the crowd. Similarly, such an order
has priority over bids and offers in the customer limit order book \17\
if at least one leg of the OEX-SPX spread would trade at a price that
is better than the corresponding bid or offer in the book. Bids or
offers that are part of an OEX-SPX spread and that are not priced at a
net multiple of \1/16\ while permissible, will not be entitled to
priority under (b)(iii) to Rule 24.18. As with other spread orders, the
Exchange has determined that the ability to transact spread orders
efficiently justifies the slight deviation from the normal rules of
priority that require an order to better any bids or offers in the
customer limit order book before they may be executed.
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\17\ The Exchange notes that one of the conditions for executing
a spread order at the best net debit or credit is that the member
has determined that the order may not be executed by a combination
of transactions with the bids and offers displayed in the OEX or SPX
customer limit order book or by the displayed quotes of the training
crowds. The Exchange states that paragraph (b)(iii) of Rule 24.18
may be reasonably and fairly interpreted to mean that if the order
can be executed in the marketplace at the order's price or at a
better price, then the order cannot be executed as a spread order at
the best net debit or credit. See Amendemnt No. 1, supra note 3.
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As an illustration, assume that the relevant OEX option, Option O,
is quoted at 5 bid, 5\1/8\ asked, and, the relevant SPX option, Option
S, is quoted at 6 bid, 6\1/8\ asked, and assume that all four quotes
are represented in the book. In that instance, a spread involving the
purchase (or sale) of Option O and the sale (or purchase) of Option S
may trade at a net credit or debit of 1 (e.g., a net credit of 1 if
Option O is bought at 5 and Option S sold at 6, or a net debit of 1 if
Option O is sold at 5\1/8\ and Option S is bought at 6\1/8\. In this
example, because the net price is multiple of \1/16\ and the execution
of the spread involves taking the same side of the market as the book
on one side of the spread at the book price, but bettering the book
price on the other side of the market, the spread would receive
priority. (That is, in the spread consisting of the purchase of Option
O at 5 and the sale of Option S at 6, only the purchase of Option O
occurs at the same price and on the same side of the market as the
book, which is bid at 5; the sale of Option S at 6 betters the market
in the book, because the ask price in the book is 6\1/8\.) In this same
example, it would not be permissible under paragraph (b)(iii) of Rule
24.18 to trade the spread at a net debit of \7/8\ by selling the first
option at 5\1/8\ and buying the second at 6, because this trade would
be executed at the same price and on the same side of the market as the
book on both sides of the spread.
Paragraph (b) (iv) permits bids and offers from the other trading
crowd to participate equally with equal bids and offers from the
primary trading station if those bids and offers from the other trading
station are received promptly. The determination of whether an order is
received promptly will depend on the size and the complexity of the
order involved. For example, a large spread order might take a minute
to execute, while a small spread order of ten contracts might require
only 15 seconds to execute. The amount of time to satisfy the time
requirement would be different in these two circumstances.\18\
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\18\ Id.
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The Exchange will investigate on a case-by-case basis any
complaints associated with the handling of OEX-SPX spread orders as it
is made aware of them.
The Exchange believes that the proposed rule will allow the
efficient conduct of OEX-SPX spread orders that will be beneficial to
both customers and traders; at the same time, the proposed rule change
is consistent with and furthers the objectives of Section 6(b)(5) of
the Act in that it is designed to perfect the mechanisms of a free and
open market and to protect investors and the public interest.
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 publication 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 the 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. 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. Sec. 552, will be available for inspection and copying at
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-97-15 and should be
submitted by June 13, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13608 Filed 5-22-97; 8:45 am]
BILLING CODE 8010-01-M
