[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Notices]
[Pages 32868-32870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16067]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37316; File No. SR-CBOE-96-10]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to
Multiple Representation
June 17, 1996.
I. Introduction
On March 6, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission'') a proposed rule change to amend
CBOE Rule 6.55, ``Multiple Orders Prohibited,'' to provide that, except
in accordance with procedures established by the appropriate Floor
Procedure Committee, or with such Floor Procedure Committee's
permission in individual cases, no market maker shall enter or be
present in a trading crowd while a floor broker present in the trading
crowd is holding an order on behalf of the market maker's individual
account or an order initiated by the market maker for an account in
which the market maker has an interest.
Notice of the proposal was published for comment and appeared in
the Federal Register on March 28, 1996.\1\ No comments were received on
the proposed rule change.
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\1\ See Securities Exchange Act Release No. 36996 (March 20,
1996), 61 FR 13907.
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II. Description of the Proposal
Currently, CBOE Rule 6.55 provides that no CBOE member, for any
account in which he has an interest or on behalf of a customer, shall
maintain with more than one broker orders for the purchase or sale of
the same option contract or other security, or the same combination of
option contracts or other securities, with the knowledge that such
orders are for the account of the same principal. According to the
Exchange, the purpose of CBOE Rule 6.55 is to prevent a person from
being disproportionately represented in a trading crowd.
In furtherance of this purpose, the Exchange also has had a long-
standing policy of prohibiting market makers from entering or being
present in a trading crowd while a floor broker present in the trading
crowd is holding an order on behalf of the market maker's individual
account or an order initiated by the market maker for an account in
which the market maker has an interest, except in accordance with
procedures established by the appropriate Floor Procedure Committee or
with such Floor Procedure Committee's permission in individual
cases.\2\ This policy prevents a market maker from avoiding CBOE Rule
6.55 by placing an order with a floor broker for a particular option
contract or other security and also representing himself or herself in
the trading crowd for such option contract or other security. The
purpose of the proposal is to specifically delineate this policy in the
Exchange's rules by including it in a new paragraph (b) to CBOE Rule
6.55.
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\2\ Exceptions to this policy which have been approved by a
Floor Procedure Committee are contained in Exchange Regulatory
Circular RG95-64, which concerns the trading activities of joint
account participants in the Standard & Poor's (``S&P'') 100
(``OEX'') and S&P 500 (``SPX'') index option classes. See also
Securities Exchange Act Release No. 36977 (March 15, 1996) (order
approving File No. SR-CBOE-95-65) (approving regulatory circular
which provides that a joint account trading in equity options may be
represented simultaneously in a trading crowd by participants
trading in person) (``Joint Account Circular'').
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In addition, the CBOE proposes to add Interpretation and Policy .01
to CBOE Rule 6.55 to specify three alternative procedures that govern
how a market maker may permissibly enter a trading crowd in which a
floor broker is present who holds an order on behalf of the market
maker's individual account or an order initiated by the market maker
for an account in which the market maker has an interest.
Under the first alternative, the market maker must make the floor
broker aware of the market maker's intention to enter the trading crowd
and the floor broker
[[Page 32869]]
must time-stamp the order ticket for the market maker order and write
the notation ``Cancel'' or ``CXL'' next to the time stamp. If the
market maker wishes to re-enter the order via the floor broker upon the
market maker's exit from the trading crowd, the floor broker must at
that time again time stamp the order ticket and write the notation
``Reentry'' or ``RNTRY'' next to such subsequent time stamp.
Under the second alternative, the market maker must cancel the
market maker order by giving the floor broker a written cancellation of
the order which is time-stamped by the market maker immediately prior
to its transmission to the floor broker. If the market maker wishes to
re-enter the order upon his exit from the trading crowd, a new order
ticket must be used by the representing floor broker.
Under the third alternative, the market maker must cancel the
market maker order by taking the order ticket for the order back from
the floor broker, provided that the market maker allows the floor
broker to retain a copy of the order ticket (which the floor broker
must time-stamp at the time of cancellation and retain for the floor
broker's records). If the market maker wishes to re-enter the order
upon his exit form the trading crowd, a new order ticket must be used.
The CBOE states that the proposed amendment to CBOE Rule 6.55 also
codifies past practice by providing that the appropriate Floor
Procedure Committee may adopt other procedures which, if followed,
would permit a market maker to be exempt from the requirements of
paragraph (b) of CBOE Rule 6.55, or may grant permission for a market
maker to enter a trading crowd in a particular instance notwithstanding
the requirements of that paragraph.\3\ Proposed Interpretation and
Policy .02 advises members to consult CBOE regulatory circulars
concerning joint accounts in connection with procedures governing the
simultaneous presence in a trading crowd of participants in and orders
for the same joint account.
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\3\ The CBOE has represented that this provision is intended to
provide the Exchange with the flexibility to address special
situations that may arise infrequently. One such situation would
exist where there is exceptionally high activity in a small trading
crowd. In this case, the CBOE may grant permission to market makers
to enter the trading crowd for a limited time. Telephone
conversation between Mike Meyer, Schiff Hardin & Waite, and Yvonne
Fraticelli, Attorney, Office of Market Supervision, Division of
Market Regulation, Commission, on May 13, 1996.
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Finally, the proposal changes the title of CBOE Rule 6.55 from
``Multiple Orders Prohibited'' to ``Multiple Representation
Prohibited'' in order to more accurately reflect the scope of the
amended rule.
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) \4\ in that it is
designed to remove impediments to and perfect the mechanism of a free
and open securities market and to facilitate transactions in
securities, while protecting investors and the public interest.
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\4\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
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Currently, CBOE Rule 6.55 prohibits members from placing identical
orders for the account of the same principal with several floor
brokers. According to the Exchange, CBOE Rule 6.55 is designed to
prevent a person from being represented disproportionately in a trading
crowd. An account using multiple orders would be represented
disproportionately because, when an execution is divided among
competing brokers, an account using multiple orders would receive a
larger share of the execution that an account using a single order.\5\
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\5\ See File No. SR-CBOE-80-11 (proposal to adopt CBOE Rule
6.55).
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The proposal, which codifies an existing CBOE policy, is designed
to prevent a market maker from avoiding CBOE Rule 6.55 by placing an
order with a floor broker for a particular option contract or other
security and also representing himself or herself in the trading crowd
for that option contract or security. By prohibiting a market maker
from entering or being present in a trading crowd while a floor broker
in the trading crowd holds an order on behalf of the market maker's
individual account or an order initiated by the market maker for an
account in which the market maker has an interest, the proposal
furthers the objectives of CBOE Rule 6.55 and prevents a person from
being represented disproportionately in a trading crowd.\6\
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\6\ In addition, the proposal is consistent with the provisions
of the Joint Account Circular, which was approved recently by the
Commission. See note 2, supra. Specifically, the Joint Account
Circular notes, among other things, that members may not enter
orders in a particular crowd with floor brokers for their individual
or joint account whenever they are trading in person in that crowd.
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The Commission believes that it is appropriate for the CBOE to
adopt Interpretation and Policy .01, which includes procedures that
will allow a market maker to cancel his order with a floor broker and
enter a trading crowd in which a floor broker is present who was
holding an order on behalf of the market maker's individual account or
an order initiated by the market maker for an account in which the
market maker has an interest.\7\ The Commission believes that the
procedures proposed in Interpretation and Policy .01 are consistent
with the purpose of CBOE Rule 6.55 in that they allow a market maker to
enter the trading crowd after cancelling his order with the floor
broker, thereby ensuring that the market maker is not represented
disproportionately in the trading crowd. In addition, Interpretation
and Policy .01 should help the CBOE to maintain a fair and orderly
market by clearly specifying procedures that will allow market maker to
enter a trading crowd in which a floor broker holds an order on behalf
of the market maker, and providing procedures that will allow the
market maker to re-enter the order with the floor broker upon the
market maker's exit from the trading crowd.
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\7\ The procedures provided in Interpretation and Policy .01 for
cancelling an order are as follows: (1) The market maker makes the
floor broker aware of the market maker's intention to enter the
trading crowd and the floor broker time stamps the order ticket for
the order and writes the notation ``Cancel'' or ``CXL'' next to the
time stamp; (2) the market maker cancels his order by giving the
floor broker a written cancellation of the order which is time-
stamped by the market maker immediately prior to its transmission to
the floor broker; or (3) the market maker cancels his order by
taking the order ticket for the order back from the floor broker,
provided that the market maker allows the floor broker to retain a
copy of the order ticket (which the floor broker must time-stamp at
the time of cancellation and retain for the floor broker's records).
Interpretation and Policy .01 also provides procedures that allow
the market maker to re-enter the order with the floor broker upon
the market maker's exit from the trading crowd.
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The Commission notes that CBOE Rule 6.55(b) allows the appropriate
Floor Procedure Committee to create exceptions to CBOE Rule 6.55(b) by
establishing procedures or granting permission to a market maker in
individual cases. The Commission believes that this provision is
appropriate and consistent with the Act because it will add flexibility
to CBOE Rule 6.55(b) by allowing the CBOE to create an exception to the
rule under extraordinary circumstances \8\ or to develop special
trading procedures, such as those established in RG95-64.\9\
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\8\ The Commission expects that the CBOE will grant such
exceptions only in limited and truly extraordinary circumstances.
See note 3, supra.
\9\ See note 2, supra. The Commission notes that the
establishment of such procedures would require a rule filing with
the Commission pursuant to Section 19(b)(2) under the Act.
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Finally, the Commission believes that it is reasonable for the CBOE
to amend the title of CBOE Rule 6.55 to clarify the scope of the rule,
and to adopt Interpretation and Policy .02, which
[[Page 32870]]
advises members to consult Exchange regulatory circulars for procedures
governing the simultaneous presence in a trading crowd of participants
in and orders for the same joint account.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-CBOE-96-10) is approved.
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\10\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16067 Filed 6-24-96; 8:45 am]
BILLING CODE 8010-01-M
